Preamble

The House met at half-past Two o'clock

PRAYERS

[Mr. SPEAKER in the Chair]

Oral Answers to Questions — RAILWAYS

Major Trunk Routes (Development)

Mr. Wingfield Digby: asked the Minister of Transport if he will make a statement on the development of the major railway trunk routes.

Mr. Rhodes: asked the Minister of Transport whether, in view of the British Railways Board's plans, outlined in Map No. 21 of Development of the Major Railway Trunk Routes, he will seek powers to control the development and selection of routes for future intensive use.

The Minister of Transport (Mr. Tom Fraser): The Railways Board's Report on the Development of the Major Railway Trunk Routes has been put forward by the Board to enable its ideas to be subjected to constructive criticism. I do not envisage any need for further powers to control the Board's activities in this connection.

Mr. Digby: Is the Minister saying that he will approve anything that the Railways Board puts up? He has had the Report in his hands since February. Is he aware that these trunk routes, if adopted, will leave out in the cold some of the most important counties in England, including Dorset?

Mr. Fraser: There is nothing in the Report about leaving out anything. It is made clear within the context of the Report that it is not a plan for action. It is a long forward look made by the Railways Board. There is no question of any action being taken on it in the immediate future.

Mr. Rhodes: Will the Minister reconsider the matter, because Map No. 21 proposes that the line linking the North-East Coast and Central Scotland is not to be developed? Is not this decision incompatible with the Government's policy for the economic development of the North-East? Will he bear in mind that his non-intervention in the matter could result in the deepest resentment in the North-East? Newcastle and Northumberland will not take lightly a decision to make them a railways cul-de-sac.

Mr. Fraser: The Report was prepared by the Board on its own initiative. The Report does not take into account the Government's policies in relation to national and regional planning. Any proposals which the Board brings forward in the future will be subject to the Minister's approval, but there is no question of my saying that everything which is written in the Report must be implemented. We all wish the Report to be used in the way in which the Railways Board has intended it to be used.

Sir W. Anstruther-Gray: May we take it from that reply that the Minister can be counted on to see that that portion of the north-east of England and the southeast of Scotland between Newcastle and Edinburgh will not be forgotten?

Mr. Fraser: I can assure the right hon. Gentleman that as long as I am in this job neither that part of Scotland nor any other part of Scotland will be forgotten.

Mr. Powell: As the previous Chairman of the British Railways Board indicated that proposals of this kind, whatever the details, were essential to getting British Railways out of the red, and as the present Chairman has indicated that to do that is one of his prime objectives, will the Minister undertake to give firm guidance to the Railways Board on what is his policy in this respect?

Mr. Fraser: The right hon. Gentleman knows that the Railways Board's policy is to get out of the red before 1984. This Report is an attempt to set out the shape of the trunk routes in the year 1984. There is no question of the implementation of this Report being essential to taking the railways out of the red. 'I his Report is not a firm plan at all.

Development Schemes

Mr. Wingfield Digby: asked the Minister of Transport whether he will give a general direction to the Railways Board to consult British European Airways and other airlines before undertaking development schemes on routes which they already serve and which often have a motorway planned in addition.

Mr. Tom Fraser: No, Sir. But when considering the Railways Board's investment proposals for major development schemes, I shall of course take into account the other forms of transport existing and planned on the routes concerned.

Mr. Digby: Will the right hon. Gentleman bear in mind the tendency now for the duplication and even triplication of our transport facilities between cities, which results in other parts of the country getting neither roads nor air services nor even adequate railways? Surely, if panning; is to mean anything at all, attention should be paid to this?

Mr. Fraser: I am much obliged to the hon. Gentleman for giving me such wholehearted support in my attempt to get our transport services properly coordinated.

Sabotage

Mr. Grant: asked the Minister of Transport how many cases of sabotage have occurred on British Railways in the last year; how this compares with previous years; who has been responsible; and, in view of the dangers to the public involved, if he will give a general direction, in the public interest, to the British Railways Board to take action to reduce the number of such cases.

The Joint Parliamentary Secretary to the Ministry of Transport (Mr. Stephen Swingler): We are informed by the British Railways Board that in 1964 some 6,300 instances were reported of acts apparently intended to disrupt or hinder the operation of the railway services; this compares with about 4,100 such cases in 1963; corresponding figures for earlier years are not available, From the evidence available it would seem that the majority of these acts were committed by juveniles of school age. The Board

is taking special measures to deal with the matter, and we do not consider that a general direction from my right hon. Friend would be appropriate.

Mr. Grant: Is the Minister aware that these incidents are causing very grave anxiety and concern to railwaymen and to the traveling public alike, and that if they continue it will undoubtedly be infinitely safer to travel by air than by railway? In view of the rather disturbing indication that these are mostly coming from juveniles, does this not indicate a rather peculiar and alarming trend in our society, and would he cast his inquiries a little wider, perhaps by consulting his colleages the Home Secretary and the Secretary of State for Education and Science?

Mr. Swingler: This is a very serious matter, and as a result of recent incidents considerable consultations have taken place between a number of Departments. It is a matter in which a wide number of people have responsibility and could help considerably. Special measures are being taken, but I think it will be appreciated by the House that we do not wish to give publicity to all these measures, because that might be self-defeating, but I can assure the hon. Gentleman that very urgent action and inquiry are going on.

Mr. Manuel: In connection with these incidents of sabotage and vandalism, and the great and growing concern now apparent among railwaymen and the railway trade union leadership, will my hon. Friend, in any discussions which are to take place, consult the trade unions and the railway workers in order to get the benefit of their experience?

Mr. Swingler: Yes. My hon. Friend can rest assured that that will be done. We require the co-operation of all concerned in trying to diagnose this problem and to take proper measures of action to solve it. The House will know that there is a Bill before Parliament promoted by the Railways Board to increase the penalties for trespassing, stone throwing, and so on. That is an example of the kind of action being taken.

Mr. Channon: Can the hon. Gentleman give an assurance that, apart from the consultations he has mentioned he


is having with his colleagues, he will keep in touch with the Home Office, because it has a very important part to play?

Mr. Swingler: Yes, the review of the penalties is going on. It is part of the action being taken. A considerable number of prosecutions have taken place in the last few weeks, and nearly 600 last year. We are reviewing the whole of the situation.

Mr. Lubbock: Has the hon. Gentleman any statistics relating to this type of offence in the current year, and do those statistics show that the measures to which he has referred are having any effect already?

Mr. Swingler: I have not got fully up-to-date figures for the current year, but I regret to say that so far as we know the number of incidents is at any rate at the same rate as occurred last year.

Design and Administration Centre, Derby

Mr. Maxwell: asked the Minister of Transport whether he will now give the estimated cost and completion date given to him by the British Railways Board, in seeking his approval for sanction of capital expenditure for its central design establishment at Derby.

Mr. Swingler: My right hon. Friend has approved capital investment of £1,025,000 by the Railways Board towards the cost of the establishment of a Design and Administration Centre at Derby. This is expected to be completed in the autumn of next year.

Mr. Maxwell: Will my hon. Friend say what is to happen to the design teams in the railway workshops such as those at Wolverton, and is alternative employment being provided for these excellent people? It would be a great shame if they were lost to the railway workshops.

Mr. Swingler: It is difficult for me to give more information because consultations are taking place between the Railways Board and the representatives of the staff—today, at this moment. But my hon. Friend can rest assured that alternative employment for some of the staff at Wolverton will certainly be

offered at Derby, For the others, of course, the normal arrangements for redundancy or offers of alternative employment will be effected.

Mr. Powell: When the right hon. Gentleman says that £1¼ million has been authorised towards the cost of this establishment, does that imply that that is only a fraction of the total cost, and, if so, a large or small fraction?

Mr. Swingler: It is part of a bigger scheme of concentration by the Railways Board, including the headquarters of British Railways Workshops, the research laboratory and the design centre, a scheme which will amount to an investment of about £2½ million. Perhaps I might put out that my right hon. Friend has approved a capital investment of £1,025,000, not 1¼ million, for the establishment of a design centre.

Fare Increases (Consumer Consultation)

Mr. Ridsdale: asked the Minister of Transport whether he will introduce legislation with a view to reforming the present machinery for consumer consultation over rail fare increases.

Mr. Swingler: My right hon. Friend has no plans at present to introduce legislation on the lines suggested by the hon. Member. Where London's rail commuters are concerned, however, I would refer him to the Answer given on 5th May to the hon. Member for Southend, West (Mr. Channon).

Mr. Ridsdale: Cannot the hon. Gentleman alter the otherwise excellent 1962 Act as far as the consultative committees outside the London area are concerned so that they can make representations over rail fares, as the railways are in such a monopolistic condition?

Mr. Swingler: I am surprised to learn that the hon. Gentleman is so satisfied with the 1962 Act, as he has protested about many of the operations under it. In relation to the new principle announced by the Government, we are considering the whole matter of the future of London railway fares, and of the commuter area, under our studies of transport co-ordination, and in relation to those studies, which are not yet complete, my right hon. Friend will have to decide whether fresh legislation is required.

Mr. Channon: May I ask the hon. Gentleman whether, during his consideration of this matter, he will also give consideration to the existing definition of the London Transport area which, unfortunately, has proved to be totally anomalous and out of date?

Mr. Swingler: That is one of the things for consideration in looking at the whole problem of London transport. We are looking at it also in relation to the future economic development of London and the regions around it, and the future pattern of employment and travel.

Liner Trains

Mr. Peter Mills: asked the Minister of Transport to what extent, in authorising the British Railways Board to incur capital expenditure on liner trains, he took into account the results of experimental liner train services already run by the Board; and what have been the loads and speeds of these trains.

Mr. Tom Fraser: There have been no experimental liner train services as such. The operational and technical trials now in progress began after investment in liner trains was authorised.

Mr. Mills: Will the right hon. Gentleman bear in mind that if he wants to make his name as a really successful Minister of Transport, one way by which he can do it is to introduce liner trains now and make them a reality? Will he also bear in mind that if he does not do something fairly soon, much of this traffic will be permanently lost to road transport and will never come back to the railways?

Mr. Fraser: I think that the hon. Gentleman is wrong in thinking that it can be done now. The vehicles have to be constructed. The terminals have to be constructed. There is a lot of physical work to be undertaken at the present time. The Railways Board is getting on with the job as fast as it can and it is getting on with its salesmanship to get the traffic on to the liner trains when they are ready to start.

Mr. Mapp: Divorcing this subject from the train manning side, may I ask my right hon. Friend whether he will be satisfied about the costing of the experimental or pre-runners of liner

trains? Is not there also a danger that the common stock of railway wagons might be replaced by a specialised form of stock which will have limited value, and which, in the event of the loss of new traffic, will not be interchangeable? Will my right hon. Friend call in special advice on the costing of these trains, particularly on the terminal and servicing aspects of them?

Mr. Fraser: I think that it would be a mistake on my part to call in special advisers to give me advice on this matter. After all, there are a lot of special advisers in the pay of the Railways Board, and special advisers in the pay of the Ministry of Transport. I do not think that we want to triplicate this kind of provision.
It seems to me that all those who have studied this matter are satisfied that the liner trains will succeed in attracting a very considerable volume of traffic which is now carried on the roads. They will do so only if new specialised railway vehicles are constructed for the purpose. These vehicles are now being constructed in the railway workshop at Derby, and I do not think this would be a proper time for me to have a review of the whole principle underlying the substitution of the existing stock of vehicles by these new ones.

Mr. Powell: Arising out of the right hon. Gentleman's previous Answer, may I ask whether he has been advised approximately when we can expect the first of these services to be put into operation?

Mr. Fraser: When, just after Easter, I gave my approval to the investment required for the introduction of the liner train service, the Railways Board said that it would take about six months from then to get the trains started. The Board has not amended that forecast.

Mr. Goodhew: asked the Minister of Transport what further progress has now been made with the introduction of liner trains for the carriage of freight on British Rail.

Mr. Tom Fraser: The British Railways Board informs me that it is pressing forward with the construction of freightliner wagons, containers and terminal facilities. Technical and operational trials started


some time ago and are progressing satisfactorily.

Mr. Goodhew: Is the Minister aware that in a Written Answer on 3rd May he said that the Executive Committee of the National Union of Railwaymen was convinced that to proceed with liner trains with open terminals would be detrimental not only to the interests of the country but to British Railways, and that it thought it best that the first routes should be drawn up on the terms laid down by the union. Is the Minister going to give in to the N.U.R. on this matter, or will he take the view that it is a question of making British Railways efficient—a question in which the British public are very interested?

Mr. Fraser: The Answer which I gave, which has been quoted by the hon. Member, was in answer to a Question asking me what representations the Executive Committee of the N.U.R. had made to me before I made my decision. This was not something subsequent to my making my decision; I made my decision in the light of the propositions already made to me by the Executive Committee. I am hoping that the discussions which have been going on for a long time between the N.U.R. and the Railways Board will continue, and that at the end of the day wise counsels will prevail.

Mr. Powell: As the Minister took his decision and gave his authorisation on the basis that the terminals would be open to all road hauliers, does he now expect that that basis will be in existence in time for the services to start, as he indicated, six months from his announcement last April?

Mr. Fraser: I expect that agreement will be reached between the union concerned and the Railways Board. It has always been my hope that the management and workers would come together and that we could have the trains operated with open terminals. I would point out that those who are anxious to get these trains operating with open terminals might exercise a little discretion in the attacks they make upon the union representatives.

Mr. Popplewell: Is my right hon. Friend aware that the N.U.R. Executive and the members of the union as a whole are anxious that these liner trains should

be put into operation as speedily as possible? Is he also aware that the only outstanding question with the N.U.R. is the refusal of the Railways Board to compete for this traffic which is being handed over to private road hauliers? Is he aware that if the Railways Board competes on proper competitive terms for this traffic there will be no trouble from the N.U.R.?

Mr. Fraser: I have never rested my transport policy on competition, as my hon. Friend is now suggesting. I want proper co-ordination between the different forms of transport, and that will be secured only by having open terminals for liner trains. I do not want to have to arbitrate in these matters; it is better that politicians should keep out, and that the two sides of the industry should come together and, as adult people, sit down and discuss the best way in which these trains can be introduced.

Paddington-Birmingham-Birkenhead Line

Mr. Ioan L. Evans: asked the Minister of Transport what proposals he has received with regard to the closure of the main express line from London, Paddington to Birkenhead via Birmingham.

Mr. Swingler: None, Sir.

Mr. Evans: Is my hon. Friend aware of the report that negotiations are taking place to sell the site of Snow Hill Station?

Mr. Swingler: Relative to the question which my hon. Friend asked about the closure of the line from Paddington to Birkenhead via Birmingham, I have assured him that no proposals have been received and that no advance notice of any proposals has been given. If he wishes to ask a specific question about the future of Snow Hill Station, I should be obliged if he would put it down.

Oral Answers to Questions — SHIPPING

Portbury Dock Scheme

Mr. Robert Cooke: asked the Minister of Transport whether he has received the report of the National Ports Council on the Portbury Dock proposals; and what is his policy on the future progress of this scheme.

Mr. Palmer: asked the Minister of Transport if he will now make a statement on the proposals of the Port of Bristol Authority for the construction of a new dock at Portbury.

Mr. Tom Fraser: I have now received the report of the National Ports Council on this very important scheme. I am considering it with the care it deserves and will announce my decision as soon as I can.

Mr. Cooke: This decision has long been and is eagerly awaited in the City of Bristol. Can the right hon. Gentleman give any indication how long it will take him to consider the matter?

Mr. Fraser: I cannot say how long it will take me. The duties I have under Section 9 of the Harbours Act require me to consider major port investment schemes within the context of port investment throughout the country as a whole. I have a lot of people with whom I will have to have consultations, including those who use the ports, shippers and shipping companies, and those who consign their merchandise through the ports as well. So I have a lot of people to consult before I can make up my mind. I will not unduly delay my decision, but I cannot promise a very quick one.

Mr. Palmer: Will my right hon. Friend bear in mind that all sections of opinion in Bristol, and not simply the Conservative Party, are very anxious to get a decision on this matter? While taking in lo account the extra time my right hon. Friend will require, will he really do his best to reach a decision very soon?

Mr. Fraser: Yes, I will, but it is a big scheme; it is a £27 million scheme; and it cannot be ready, in any case, for five years at the very earliest. It is important that I should consider the scheme carefully before making a decision.

Mr. Powell: What is the relationship of this Report which the Minister has received with the interim proposals of the National Ports Council which he was due to receive and have those reached him?

Mr. Fraser: I am not so sure about the relationship between this and the interim Report of the National Ports Council. I should like to think about this, and perhaps get in touch with the

right hon. Gentleman. The National Ports Council has now reported to me on this, as I say, and I shall have to consider this Report within the context of its interim proposals for the ports of the country as a whole. None the less, it has been able to come to certain views about Portbury which it indicated to me.

British Railways Ports (Accounts)

Mr. Ridsdale: asked the Minister of Transport whether he will issue a general direction, in the public interest, to the British Railways Board that all ports under its control should issue yearly accounts to show the profit or loss made in their operation.

Mr. Tom Fraser: No, Sir. Port operation is a relatively minor function of the Railways Board, and I do not think that publication of individual trading accounts for each harbour is warranted.

Mr. Ridsdale: What is the reason for that? Is the Minister aware that this is a thoroughly bad commercial practice? Why are not separate accounts published for each port?

Mr. Fraser: I explained why this practice is carried out. The Railways Board was created principally for the purpose of running railways. It owns a few ships and a few relatively small harbours. Up to now it has been considered better that it should be permitted to lump all the harbours together and report on them collectively. We must be very careful before imposing obligations upon the Railways Board to deal with these harbours individually in its Annual Report, in the same way that the Docks Board does. That Board has no other job to do, and it is looking after much bigger enterprises.

Mr. Powell: But does not the right hon. Gentleman recognise the validity of the general recommendation of the Rochdale Report that there was no point in having collective accounts of a number of ports operating in different circumstances, and that the operation of the utility could be judged only if they were separately accounted for? Even if this is not a matter for a general direction, will not the right hon. Gentleman, using the informal ways that are open to him,


see that this recommendation is complied with in this respect?

Mr. Fraser: In his own supplementary question the right hon. Gentleman qualified the reference to the National Ports Council's recommendation, because it does not follow from that recommendation that the Railways Board should account separately for each of these small harbours. I am quite willing to have a word with the Railways Board to see whether there would be some advantage in its harbours being accounted for separately. I understand that up to now the Board has not thought that there was any advantage, or was not aware of any clamour, or demand, or wish that it should account for its harbours in this way.

River Ouse (Navigation)

Mr. Alison: asked the Minister of Transport what proposals he has put forward for making the Yorkshire Ouse permanently navigable between Selby and Goole, and for making the latter harbour a constant-water port.

Mr. Swingler: None, Sir. Responsibility for the upper part of this stretch of the Yorkshire Ouse rests with the Ouse Navigation Trustees, and for the lower part and the port of Goole with the British Transport Docks Board.

Mr. Alison: Is the Parliamentary Secretary aware that a Selby shipbuilding firm which is generally recognised as one of the most up-to-date and dynamic of the smaller shipbuilding firms is now severely hampered by the inadequacies of this stretch of the river and that it is felt locally that the Minister should do more to develop, increase and widen the scope of the Yorkshire Ouse for shipbuilding purposes? Will he look at this again?

Mr. Swingler: I am afraid that my right hon. Friend has no responsibility here. The responsibility rests entirely with the Ouse Navigation Trustees, who are the York Corporation. If the hon. Gentleman cares to make any representations, we will pass them on to the appropriate authorities for immediate consideration.

Oral Answers to Questions — TRANSPORT

Driving and Drink

Mr. Dudley Smith: asked the Minister of Transport if he has yet received the Report of the Road Research Laboratory

on the alcohol factor in road accidents at Christmas and the New Year 1964; and if he will make a statement.

Mr. Tom Fraser: I hope to have it by the end of the week. I shall decide what action to take when I have studied it.

Mr. Dudley Smith: Can the Minister say whether or not, when he introduces his legislation on the question of drinking and driving, he proposes to introduce a test of micro samples of blood rather than the use of breathalysers?

Mr. Fraser: This is one of the matters which is as yet undecided. There is a working party under my right hon. and learned Friend the Home Secretary, for this really refers to enforcement, which is his responsibility and not mine. But we have not yet determined by what means the test will be made.

Mr. Gresham Cooke: With regard to the accident rate at holiday times, would the right hon. Gentleman say whether his research people have found any correlation between accidents and weather? When there is a bright, sunny weekend it seems there are more accidents than when it is dull. Perhaps when it is fine and sunny special warnings should be issued—

Mr. Speaker: We cannot, in dealing with alcohol, deal with all possible causes of accidents.

Mr. Emrys Hughes: Has the Minister observed that during the recent Finance Bill debates the Opposition has demanded a decrease in the price of whisky? Does he not think that a decrease in the price of whisky might mean an increase in road accidents?

Okehampton

Mr. Peter Mills: asked the Minister of Transport how he proposes to overcome the traffic problem at Okehampton in Devon.

Mr. Swingler: In the longer term, by the provision of a bypass. Some relief is already provided by signposting an alternative route for eastbound traffic, and further traffic management measures are under consideration.

Mr. Mills: Would the Minister, having turned down the inner relief scheme which was suggested to him, and the bypass being out for a number of years due to the cost of it, look at this matter


again, because there is a very real problem, causing untold hardship to the very many travellers passing through the county?

Mr. Swingler: The bypass is not out. The fact is that this is a scheme which we consider necessary for the future, but at the moment its nature has not been assessed and it has not been programmed. We are certainly going to do work on it. Vie are reviewing proposals for new traffic management measures in Okehampton, and at the same time some minor improvements in the road will take place in the next few years.

Damaged Vehicles (Repair and Resale)

Mr. Rose: asked the Minister of Transport what has been the result of his consultations with the Home Secretary in relation to vehicles written off by insurance companies and subsequently repaired and sold after an accident.

Mr. Tom Fraser: Measures are being taken to ensure that the arrangements which exist between my traffic area staffs and the police for investigating reports of the sale of unroadworthy vehicles are fully used. It would make enforcement easier if such reports were made immediately the facts are known.

Mr. Rose: Will my right hon. Friend bear in mind that this practice is becoming alarmingly prevalent? Will he also bear in mind that the purchasers of these cars very often do not know the history of them, and that they are therefore put in real physical danger? Will my right hon. Friend use the powers available to him under the Road Traffic Act to deal with this problem, and in some way safeguard the interests of the purchaser?

Mr. Fraser: One of the real difficulties is that one does not know which vehicles are written off by insurance companies and subsequently repaired, nor does one know the number of vehicles, carrying only third party insurance, which are not involved in an accident with another vehicle but merely crash themselves, so that there is no question of an insurance company being involved. Such cars can be cannibalised, if that is not an improper

word to use in this context, and put back on the road without anybody in official circles knowing anything about them. We are investigating this matter. We are in consultation with insurance interests to see what more can be done, but the best safeguard for the purchaser of a second-hand car is to get a report on it from a reputable garage, or from the R.A.C. or the A.A.

Lane Discipline

Sir R. Nugent: asked the Minister of Transport what steps he will take to enforce his arrangements to improve lane discipline.

Mr. Tom Fraser: I would refer the right hon. Member to my Answer to him on 5th May. I am not at present planning to introduce legislation for the enforcement of lane discipline.

Sir R. Nugent: But is the Minister aware that the response to his exhortations and propaganda has been very poor and that the general standard of lane discipline on our roads is dangerously low? Will he consider legislation on the lines of that introduced by some countries abroad, for instance, the mandatory use of trafficators for vehicles pulling out of one lane into another, or, as is found in America, the statutory obligation on a vehicle pulling out to avoid interference with the vehicles in the next lane? Will he consider legislative action in order to achieve a higher standard, which will reduce accidents and improve traffic flow?

Mr. Fraser: It is a fact that lane discipline is not well observed in this country at present. This is why a leaflet, giving more guidance on this, is being issued, as I stated in the reply which I gave on 5th May. The Highway Code also gives some advice in the matter. I do not rule out the possibility of legislation, but I do not want to promise that it will be introduced at an early date. It is the sort of matter on which I had better have the advice of the recently constituted National Advisory Council on Road Safety.

Mr. Lipton: If the combined effect of the Highway Code and this new leaflet is not satisfactory, will the Minister then


consider, as an urgent matter, the introduction of legislation, because lane discipline in this country is in a shocking state?

Mr. Fraser: It is in a bad state and I have stated the circumstances in which I would consider legislation, but we have also to consider whether such legislation—if we had it—would improve lane discipline. There are some difficulties in defining the offence with precision, as is within the knowledge of other countries where legislation has been introduced. It is already an offence to drive dangerously or without due care and attention, and sloppy sliding from one lane to another can be prosecuted as dangerous or careless driving. I have said that I will have this matter taken into account.

Exhaust Fumes (Air Pollution)

Mrs. Joyce Butler: asked the Minister of Transport what study he has made of the United States Bill to reduce air pollution from car exhausts starting with the 1968 models of United States and imported cars; and if he will introduce similar regulations in this country.

Mr. Tom Fraser: My technical officers are continually studying measures taken in the United States to combat the problem of air pollution from motor vehicles. Legislation in the U.S.A. is directed largely at a form of pollution which is not significant in the different conditions here. Similar regulations, therefore, would not be appropriate; but if our studies disclose the need for greater control of motor vehicle emissions and practical means of achieving it are available, I will certainly consider making suitable regulations.

Mrs. Bulter: While thanking my right hon. Friend for that reply, may I ask whether he appreciates the extent of the public and medical concern about this form of air pollution here? Since it will be impossible to export British cars to the United States after 1968, and to California and probably some other States after next year, unless they have these anti-pollution devices, would it not be a golden opportunity for the Government to take action which would benefit public health here and would help to facilitate car exports?

Mr. Fraser: We should take all reasonable actions to protect public health in this country, but we must not get out of perspective the kind of legislation introduced in another country. In California as from 1st January next year new motor vehicles having engines of 2·4 litres or more will be required to be so constructed that the amount of noxious gases emitted will not exceed certain specified levels. But there are not many motor cars in this country with engines of that size, and our exporters of engines of that size to the United States will take appropriate action to ensure that they are not kept out of that market after 1st January next year.

Mr. Dudley Smith: Nevertheless, is the Minister not aware that there is concern in America that fumes from motor cars and heavier vehicles are a contributory cause of lung cancer? Will not he consider the matter again and consult his right hon. Friend the Minister of Health in framing future legislation?

Mr. Fraser: Yes, but the immediate proposition which the hon. Member put to me is much more a matter for my right hon. Friend the Minister of Health.

London Transport (Lost Property)

Mr. Dodds: asked the Minister of Transport (1) if he will give a general direction, in the public interest, to the London Transport Board to coordinate its policy in dealing with property left in its buses with that of British Railways, so that passengers are not required to pay excessive sums in order to regain their lost property;

(2) in view of the dissatisfaction arising from the London Transport (Lost Property) Regulations, 1960, following the excessive demands made for the return of lost property when claimed by the owners, and of realistic charges imposed in other forms of public and private transport, if he will review the Regulations with the object of bringing them more into line with modern practice.

Mr. Tom Fraser: The statutory responsibilities of the London Transport and British Railways Board for lost property are entirely different. I have no evidence that there is any significant volume of dissatisfaction with London Transport's Regulations and the Board assures me that it deals sympathetically with appeals to it when hardship may arise.

Mr. Dodds: How much longer is this farce to go on? Is my right hon. Friend aware that an elderly widow who left in a bus her handbag with her life savings of £267 had to give £40, which is the 15 per cent. which the authority is forced to charge, in order to get it back, and that another person who left £930 had to pay £139 12s. 10d.? If they had lost them on the railways it would have cost 4s. up to 48 hours and 8s. after that. Is my right hon. Friend aware that when I made inquiries I was told that the difference is due to the fact that the British Railways Board is allowed to make its own regulations whereas the provisions on the buses are forced on them by the London Transport (Lost Property) Regulations, 1960? Is my right hon. Friend aware that this is a farce which the bus crews think is highway robbery?

Mr. Fraser: My hon. Friend has under lined the fact that the London Transport Board operates under very different regulations from the British Railways Board or bus operators or anyone else in the country. Nobody else, not even the British Railways Board, has any statutory liability to safeguard lost property. London Transport has a statutory responsibility, whereas other operators have not, and it has to undertake considerable cost in protecting lost property which is handed in. The charge imposed by regulations merely meets the cost of the service which the Board gives to the public. The Board makes concessions to people where hardship would perhaps be involved. My hon. Friend mentioned the amount paid by two elderly ladies of £40 and £139. In fact, these fees were reconsidered and the amounts ultimately charged were £5 and £20 respectively.

Mr. Powell: But does the right hon. Gentleman think that the sort of scale embodied in these regulations is justified by the obligation placed upon London Transport? Surely this is a matter which ought to be reconsidered. This is a quite unrealistic ratio. The cost of safeguarding property can surely be met without this kind of a scale.

Mr. Fraser: Bearing in mind that these regulations were made in 1960 and that very much bad legislation was passed at that time, it would be very improper of me not to undertake to have a look at them. But I stand by what I said:

the London Transport Board at present does no more than recoup the cost which it incurs in looking after lost property. The number of complaints is small—about two per thousand of the people who lose property and who ultimately go to London Transport to reclaim it. It is not very usual for elderly ladies to lose sums of £300 and £900 when travelling in buses in this country. My hon. Friend called attention to very exceptional cases.

Mr. Speaker: Mr. Shinwell. Question No. 32.

Several Hon. Members: rose—

Mr. Dodds: On a point of order. I should like to raise the matter—

Mr. Lipton: Why?

Mr. Dodds: Because Mr. Speaker called my right hon. Friend the Member for Easington (Mr. Shinwell). I beg to give notice that, because of the unsatisfactory nature of the reply, I shall raise the matter on the Adjournment.

Mr. Speaker: I will accept the notice, but not on the basis that there is anything unsatisfactory about the right hon. Member for Easington (Mr. Shinwell).

Oral Answers to Questions — ROADS

A.303 Road (Accidents)

Lieut.-Commander Maydon: asked the Minister of Transport how many road accidents have occurred in the last five years at Blackford Hollow between Wincanton and Sparkford in Somerset on the A.303; what have been the numbers of casualties, fatal and injured; and how many vehicles have been involved.

Mr. Swingler: During the five years ending 31st May, 1965, 25 accidents in the vicinity of Blackford Hollow were reported, involving 56 vehicles. Two persons were killed and 22 injured.

Lieut.-Commander Maydon: Will the hon. Gentleman consider the construction of many more short lengths of dual carriageway on this and other seasonally heavily trafficked roads—as his predecessors did on the section of this road between London and Basingstoke—as this provision allows drivers of vehicles to overtake in safety without being prompted


to drive dangerously by impatience or frustration?

Mr. Swingler: We recognise the need for action, and in fact the county surveyor is at the moment preparing an interim scheme to widen this road to 24 feet. This is something which we hope will be paid for under the minor improvement programme, and therefore can be done urgently. In the longer term, we recognise the need to provide dual carriageway roads.

Cavendish Square (Parked Cars)

Sir J. Langford-Holt: asked the Minister of Transport if he is aware that a large part of the carriageway in Cavendish Square which has been taken out of service during the construction of the Victoria line has been used for the all-day parking of 30 motorcars; and what action he proposes to take.

Mr. Tom Fraser: This is a matter governed by Section 46 of the British Transport Commission Act, 1955, and is entirely the concern of the London Transport Board and the Westminster City Council.

Sir J. Langford-Holt: Is the right hon. Gentleman aware that a large part of the carriageway is being taken out of service, thus creating difficulties for buses and other transport, and is being used for the private parking of a large number of cars within an area which has been taken for the purpose of the works in progress? Will the right hon. Gentleman look at this again?

Mr. Fraser: There is no point in my looking at it again, if it is not my responsibility. I assure the hon. Gentleman that I have enough troubles of my own without sticking my nose into someone else's problem.

M.2 Motorway (Anti-dazzle and Crash Barriers)

Sir B. Janner: asked the Minister of Transport if he will make a statement on the tests which have been made on the M.2 with the use of rosa multiflora japonica bushes as anti-dazzle barriers and their advantages as road safety devices; and if he will arrange for future lengths of motorways to be sufficiently wide for the placing of these shrubs in the centre.

Mr. Swingler: The tests, which are being carried out with indigenous shrubs not with rosa multiflora japonica, are designed to ascertain whether plants can survive in the difficult conditions prevailing on the central reserve of motorways in this country. The experiment has been in progress for only a few months and it is too early to draw any conclusions. Experiments at the Road Research Laboratory have shown that the central reserve would have to be several times wider than the present standard 13 ft. to accommodate a hedge of rosa multiflora japonica thick enough to act as an effective crash barrier. We do not consider that the cost of this would be justified.

Sir B. Janner: Will the hon. Gentleman give this matter further consideration, in view of the fact that this device has been extremely useful in preventing accidents in other countries? Will he see to it that in future, when a length of motorway is constructed, it will he sufficiently wide to allow for the planting of this kind of bush? Is he aware that if this had been done previously many accidents would not have occurred?

Mr. Swingler: We are certainly determined to carry on with the experiments, at any rate with the 11 indigenous shrubs, like hawthorn, privet and broom, whether or not we use rosa multiflora japonica. But I must tell the House that we are advised, as a result of the experiments of the Road Research Laboratory, that we should need a central reserve of 52 ft. compared with the 13 ft. we have now in order to provide for a fully effective crash barrier, and that this would add £110,000 per mile to the cost. That is the result of the work of research scientists. That is the advice that we have at the moment, but the experiments will continue in an effort to find the best results.

Sir J. Langford-Holt: Is it not fantastic that five years after motorways first came into existence we still have not made up our minds what can be done to prevent dazzle from oncoming traffic?

Mr. Swingler: It is not a question of making up our minds. We are continuing to investigate the possibilities of improving the methods of counteracting dazzle, and at the same time trying to provide an effective crash barrier in


circumstances where vehicles are travelling at very high speeds. What I have said is based upon the experiments carried out by the people who are best qualified at the Road Research Laboratory. That is the scientific advice that we have at the moment.

Roads, Tadcaster (Accidents)

Mr. Alison: asked the Minister of Transport how many road deaths occurred in the Tadcaster Police Division in the first quarter of 1965; how this number compares with the corresponding figure for 1964; and what action he will take in this connection.

Mr. Swingler: There were 14 fatalities in road accidents in the first quarter of 1965 compared with six in the first quarter of 1964.
These accidents occurred at widespread places in the Tadcaster Police Division, some on trunk roads and some on roads for which the West Riding County Council is responsible. I have sent the hon. Member details of the accidents, and of the road improvements proposed in the cases where it is thought they would help reduce accidents.

Mr. Alison: I thank the hon. Member for that Answer, and for kindly sending me the papers that he referred to. But does not he agree that the trend reflected in these figures—an increase of over 100 per cent.—is quite a disastrous one, which warrants special action being taken really to enforce speed limits in this part of the country?

Mr. Swingler: I agree with the hon. Gentleman that this is a serious record and that something urgent needs to be done about it. A number of proposals, as I said in my letter to him, are under immediate consideration. We hope that some measures—both of traffic management, better enforcement of the speed limit and some road improvements—can take place urgently, pending the longer-term plan to bring about a bypass.

Waiting and Loading Restrictions, London

Mr. Berry: asked the Minister of Transport if he will make a statement on the experimental waiting and loading restrictions at road junctions in the London traffic area which began on 5th April.

Mr. Tom Fraser: The responsibility for this experiment lies with the several traffic authorities to which my responsibilities for traffic in London were transferred on 1st April last. It will be for them to review it when they consider that it has been in progress for sufficient time for useful conclusions to be drawn.

Mr. Berry: Is the Minister aware that, so far, these experiments have proved extremely successful in Southgate, which is one of the areas where they are being tried out? Will he use his best offices, and consider making them permanent and extending them to other parts of London?

Mr. Fraser: I understand that that is so, but I think that it would be better for me not to make representations to the people who have taken over my responsibilities so recently as to how they should discharge them in future. However, no doubt they will take note of what the hon. Gentleman has said.

Broadmead Road, Woodford Green (Pedestrian Crossing)

Mr. Patrick Jenkin: asked the Minister of Transport whether, in view of the recent widening of the western end of Broadmead Road, Woodford Green, and the consequent increase in the speed of traffic using the road, he will now provide a controlled pedestrian crossing over Broadmead Road at its junction with Charteris Road.

Mr. Tom Fraser: No, Sir. The London Borough of Redbridge will, I understand, be widening Broadmead Road at this junction and installing refuge islands to enable pedestrians to cross in two stages. I consider this the better course.

Mr. Jenkin: Will the right hon. Gentleman undertake to look at this again? Does he not recognise that, since the dual carriageway was introduced on the first hundred yards, the remainder of the road has become exceedingly dangerous for pedestrians to cross and that even the suggestion which he has just made is unlikely to make it any safer, or significantly safer, for pedestrians to cross this road?

Mr. Fraser: I have said that certain steps are being taken. The hon. Member


calls attention to great danger on this road. According to all the information which I have had, since December, 1962, only two accidents involving pedestrians have been reported at this junction, so that it does not seem to have such a high accident record as the supplementary question would suggest. In any case, the House, I think, would be willing that I should have proper consultations with the appropriate highway authorities and that they should get their proper place in the scheme of things in our democracy.

Coventry Road, Birmingham

Mr. Ioan L. Evans: asked the Minister of Transport if he will take steps to reduce accidents and the possibility of accidents on the Coventry Road, Birmingham, between Church Road and Elmdon Airport.

Mr. Tom Fraser: On the short trunk road section from Elmdon Airport, signs have recently been erected near the City boundary where the road becomes single carriageway. My classified road programme includes a scheme for extending the dual carriageways westwards to pass under Church Road.

Mr. Evans: I thank my right hon. Friend for that reply and for the prompt action which he and the Ministry took on the representations which I made on behalf of local residents' associations. Will he continue to look at the statistics of traffic on this road, because it is likely to be a feeder road to the motorway linking the M.1 to the M.6?

Mr. Fraser: Yes, Sir.

Classified Roads (Maintenance)

Sir H. Lucas-Tooth: asked the Minister of Transport what instructions or advice he has given to county and district council surveyors to keep him and one another informed about proposals to carry out maintenance work on classified roads which may affect traffic diversions arranged in connection with roads elsewhere.

Mr. Swingler: None, Sir. We leave this to the discretion of the local highway authorities concerned.

Sir H. Lucas-Tooth: As the Parliamentary Secretary will be aware, on a recent occasion when the traffic along the A.4

was diverted along the A.350, one urban district council on the A.350 took the occasion to dig it up in order to lay water pipes. Does he regard that as an example of good planning? Surely it is within his powers to do something about it.

Mr. Swingler: Planning is not always as good as it might be, nor as well coordinated, but this is a matter in which local highway authorities and other authorities must concert the action which they are taking. We feel that it cannot be dealt with by direction by my right hon. Friend, but we certainly wish that all local highway authorities—in conjunction, of course, with the divisional road engineers—would inform one another of the actions which they are taking and would endeavour, together with the police, to concert them for the benefit of travellers.

Cumberland Basin Road Improvement, Bristol

Mr. Robert Cooke: asked the Minister of Transport what was the cost of the Cumberland Basin road improvement in Bristol; what was the cost of the opening ceremony and subsequent celebrations; and for how many hours the new bridge was closed to traffic on each day in the four months following the opening.

Mr. Tom Fraser: The total cost of bridge and roadworks was about £2½ million.
The new bridge, which was opened about two months ago, has been closed in daytime for total periods varying from 17 minutes to 3 hours to allow ships to pass, and for up to about 6 hours when the bridge had also to be closed for technical adjustments. I am sending the hon. Member a full schedule of daily closures.
The arrangements for the opening ceremony were the responsibility of the highway authority, Bristol City Council.

Mr. Cooke: While I am very grateful for the basic statistics, may I ask the right hon. Gentleman to circulate the details in the OFFICIAL REPORT? Will he continue to take as big an interest in this bridge now, in view of the difficulties, as he did when he came to open it?

Mr. Fraser: It would be quite inappropriate to set out a full schedule of the daily closures in the OFFICIAL REPORT—

Mr. Cooke: Why?

Mr. Fraser: Because it could not be of great interest to the House as a whole. The hon. Member happens to be a Bristol Member. This is a matter which affects Bristol; the bridge is operated by Bristol City Council, not by the Ministry of Transport. I do not think that it would be for me to indicate to the House of Commons the business of Bristol City Council. Incidentally, the basic statistics which I gave in my reply show that the bridge, which the hon. Member thought had been open for four months, has, in fact, been open for two months.

Mr. Palmer: Is my right hon. Friend aware that the reason for the withdrawal of this bridge from service is the list of troubles which are normal in a new engineering enterprise and that therefore the Question asked by the hon. Member for Bristol, West (Mr. Robert Cooke) is trivial in the extreme?

Mr. Fraser: It ought to be made clear that the mechanism is still in the commissioning stage and that the bridge has not yet formally been handed over to the highway authority. The criticisms which have been made are therefore a little out of turn.

Mr. Cooke: On a point of order.

Hon. Members: Sit down.

Mr. Speaker: Order. There should be silence so that I may hear the point of order.

Mr. Cooke: In view of the unsatisfactory nature of the reply, I beg to give notice that I shall raise the matter on the Adjournment.

A.19 Road

Mr. Shinwell: asked the Minister of Transport when he expects the A.19 road improvements to be completed.

Mr. Tom Fraser: The diversions at Sheraton and Shotton are almost complete. So is an improvement at Trenholme Bar. Work on the length between Wolviston and Sheraton started in February of this year.
Preparatory work, including Order making, surveys and land acquisition, is well in hand on the rest of the A.19

north of Thirsk. We aim to start work on some further lengths this year and on all the rest within the next four years.

Mr. Shinwell: Does not my right hon. Friend consider that there is undue delay in completing the improvements on this important road? Is that due to a shortage of labour? Is he aware that there is plenty of labour available in the neighbourhood? Has he seen a report that a farmer in the neighbourhood allows his cows to pass four times over that road? When this new improvement was planned was this taken into consideration?

Mr. Fraser: I should like to consider the last point made by my right hon. Friend. I had thought that the time taken was rather long for a 50-mile stretch of road, but in considering whether I could adjust the time-table for the road I had to take into account the size of the road programme nationally and the size of the road programme within the region. This road is to a considerable extent a duplicate of the A.1 travelling northwards. The two roads run virtually parallel. A lot of money is being spent on the A.1, and there are other roads in the area which are taking a lot of expenditure and resources over the next few years. If I were to give higher priority to the A.19, the question is whether it would be at the expense of any of the other highways in the area.

Mr. Turton: Is the right hon. Gentleman aware that this road is not parallel to the A.1 but runs diagonally from it and that it is one of the most dangerous pieces of road in this country, quite inadequate for the amount of industrial traffic carried on it? Will he do something to expedite this very urgent work?

Mr. Fraser: I frequently hear hon. and right hon. Gentlemen say, "This road in which I am interested is one of the most dangerous roads in the country." I begin to wonder what that means. Certainly, from the point of view of the number of accidents, this is not one of the most dangerous roads in the country. I am not saying that it is an unimportant road. It is because it is an important road that the whole road is being improved within the next four years, that work is going on, that additional work will be put in hand this year and that all the work on the whole length of road


will be put in within the next four years. I was replying to a further question when I said that I found it difficult to compress the time within which the work could be completed. But let us not get this out of proportion and pretend that this is one of the most dangerous roads in the country.

SEVEN HUNDREDTH ANNIVERSARY OF PARLIAMENT

Motion made, and Question proposed, That an humble Address be presented to Her Majesty as follows:
Most Gracious Sovereign,
We, Your Majesty's most dutiful and loyal subjects the Commons of the United Kingdom of Great Britain and Northern Ireland in Parliament assembled, humbly beg leave to offer to Your Majesty our sincere thanks for the reference to the seven hundredth anniversary of Parliament in the Gracious Speech which Your Majesty made to both Houses at the first meeting of this present Parliament.
It is fitting that the English Parliament summoned by King Henry III at the instance of Simon de Montfort, Earl of Leicester, and Steward of England, to meet in London on 20th January, 1265, should be especially recorded. It was the first known English Parliament to which representatives of the citizens and burgesses were summoned, in addition to Prelates, Lay Magnates and Knights of the Shire. There were thus present for the first time in Parliament the chosen representatives of the Communities of England—the shires, cities and boroughs—who were in later generations to constitute the House of Commons.
We rejoice that the principles of parliamentary government have been developed and strengthened through seven centuries of history. We rejoice, moreover, that they have been established in many countries which recognise Your Majesty as Head of the Commonwealth. It is with special pleasure that we express our thanks to Your Majesty for the arrangements which have enabled us to welcome the Speakers and Presiding Officers of so many Parliaments in the Commonwealth among us on this occasion.
We humbly thank Your Majesty for this opportunity to celebrate the origin and development of this institution, the Crown in Parliament, which is the foundation of our liberties under the rule of law, and trust that with God's help it may ever be preserved.—[Mr. Bowden.]

Mr. Speaker: The Question is�ž�ž

Mr. Rankin: On a point of order�ž—

Mr. Speaker: Not while I am putting the Question.

Question put and agreed to, nemine contradicente.

Mr. Rankin: On a point of order, Mr. Speaker. May I direct your attention to the fact that, once again, Question No. 35, standing in my name, has not been reached. I may say that it has stood in my name for quite a long while. I regret that my right hon. Friend the Lord President of the Council seems to have


been muzzled on this matter. May I ask whether it is possible for the Lord President of the Council to be heard for the second time in this Parliament by replying to Question No. 35?

[35. Mr. RANKIN: To ask the Lord President of the Council if the founding of Scotland's Parliament 600 years ago will be comprehended in the celebrations of 700 years of Great Britain's Parliament.]

Mr. Speaker: I am afraid not. There is no machinery by which it can be done. Nor—

Mr. Rankin: Further to my point of order—

Mr. Speaker: Order. Nor did I frustrate any wishes of the hon. Member in any way when I refused to hear his point of order while I was putting the Question, because what he wished could not have been done at any time after 3.30.

Mr. Rankin: Further to my point of order, and ignoring my complete frustration, perhaps I may point out that by next Wednesday this Question will not matter one iota, as the occasion for its appearance on the Order Paper will have passed. This is a matter of extreme importance to many of us on both sides of the House in regard to an occasion of this nature which we all want to join in celebrating. All I ask is that Scotland may join in that celebration in an appropriate fashion. I therefore appeal to you, Sir, on the ground that this is a special occasion which may not occur again, that you might give the Lord President of the Council the opportunity to reply to this Question.

Mr. Speaker: I share, with respect, all the hon. Gentleman's enthusiasms, but they do not alter my powers. I do not have any power to do this; I am sorry.

Mr. Baxter: On a point of order, Mr. Speaker. This matter is rather important from the Scottish point of view. We have not had an opportunity to express our point of view on this very important subject, and I do not think that it is becoming to the House of Commons that it should be so. We have been asked to celebrate a very important event—

Mr. Speaker: No point of order arises about that now. I would do anything I could to assist the hon. Gentleman, but I cannot. I do not have the power. I must not get involved.

Mr. Baxter: Perhaps you will give me your indulgence, Mr. Speaker, and your guidance, if I may say so. I should like to know how we can raise a matter that is of some public importance, especially to the people of Scotland. I would ask you to advise the House, and myself in particular—along with my hon. Friends—as to the proper method of getting an explanation of how celebrations relating to the seven hundredth anniversary of the British Parliament are taking place when this cannot be so in fact. Can you tell us how I can go about getting this point clarified?

Mr. Speaker: I can help the hon. Gentleman on the procedural matters. If he wants to know that, presumably he could put down a Motion to cause it to be discussed, and ask for time. But I cannot help him about the factual matters; they are not within my province.

Sir Knox Cunningham: Will you rule, Mr. Speaker, that on Tuesday we celebrate the United Kingdom Parliament, and that the greater includes the less?

Mr. Speaker: No, I do not rule about it at all in any way. It does not arise.

Resolved,
That the said Address be presented to Her Majesty by the whole House.—[Mr. Bowden.]

Motion made, and Question proposed,
That such Members of this House as are of Her Majesty's Most Honourable Privy Council do humbly know Her Majesty's Pleasure when She will be attended by this House with the said Address and whether Her Majesty will be Graciously pleased to permit the invited representatives of overseas Parliaments of the British Commonwealth to accompany this House in attending Her Majesty.—[M r. Bowden.]

Mr. Emrys Hughes: Is my right hon. Friend the Leader of the House aware that, in his time, Simon de Montfort was regarded as a dangerous Left-wing revolutionary; that the right hon. Gentleman the Leader of the Opposition still has certain suspicions about him; and that if he were to come back he would be punished by being put on the Scottish Grand Committee?

Mr. Rankin: Would it be in order for me, Mr. Speaker, to ask my right hon. Friend the Lord President of the Council whether he will extend the celebrations that are to be undertaken next week from 22nd and 23rd June to 24th June—

Mr. Speaker: No, that would not be in order on this Question. The Question is the Question I have just read.

Mr. David Steel: On a point of order, Mr. Speaker. Is this Motion now open for discussion?

Mr. Speaker: Yes, but only such matters as are of relevance to the Motion.

Mr. Steel: I wondered whether the Lord President of the Council could inform the House whether he is aware of the judgment given by Lord Cooper in the case of MacCormick v. the Lord Advocate, in 1953, that "the Union legislation", namely, the Act of Union of 1707, "extinguished the Parliaments of England and Scotland and replaced them by a new Parliament", the one in which we are now sitting?

Mr. Speaker: Order. With due respect to the judgment in question, I do not quite follow its relevance to this matter of members of the Privy Council attending to find out Her Majesty's pleasure.

Mr. Rankin: May I suggest, Mr. Speaker—

Mr. Speaker: If the hon. Gentleman wishes to speak again, he is required to ask the leave of the House.

Mr. Rankin: Mr. Rankin rose—

Hon. Members: No.

Mr. Rankin: I thought—[HON. MEMBERS: "No."] If I may seek leave to do so—[HON. MEMBERS: "No."]—I was about to say—

Hon. Members: No.

Mr. Speaker: I am sorry, but it would appear from some sounds which approach my ear that the hon. Gentleman does not have leave to speak again.

Mr. Rankin: But, Mr. Speaker, may I suggest—[HON. MEMBERS: "No."]—that that does not bother me in the least? I am asking—

Mr. Speaker: The hon. Member cannot make suggestions, because he cannot get leave to speak again.

Mr. Rankin: I have not spoken at all yet.

Mr. George Y. Mackie: On a point of order. Is it not relevant that we should discuss the accuracy of the date of the celebrations on which we are presenting an humble Address to Her Majesty?

Mr. Speaker: Not on this Question, so far as I can see.

Question put and agreed to.

Ordered,
That such Members of this House as are of Her Majesty's Most Honourable Privy Council do humbly know Her Majesty's Pleasure when She will be attended by this House with the said Address and whether Her Majesty will be Graciously pleased to permit the invited representatives of overseas Parliaments of the British Commonwealth to accompany this House in attending Her Majesty.

Orders of the Day — FINANCE (No. 2) BILL

Considered in Committee [Progress. 15th June].

[Dr. HORACE KING in the Chair]

Clause 60.—(DOUBLE TAXATION RELIEF, AND OVERSEAS TRADE CORPORATIONS.)

3.41 p.m.

The Chairman: We now come to Amendment No. 556, with which, I think, it would be convenient to take Amendments. No. 555: In page 75, line 31, at end insert:
(d) if and in so far as any foreign tax chargeable by the Government of a country of the Commonwealth on the profits of a company for any accounting period (the profits in respect of which the foreign tax is charged being hereinafter referred to as "the foreign profits") shall exceed the due proportion of corporation tax chargeable on the profits of such company attributable to the foreign profits the excess of such foreign tax shall he deemed to have been paid rateably according to their shareholdings by the shareholders of such company and shall subject to the provision of Part XIII of the Income Tax Act. 1952, be allowable as a credit against any income tax or surtax charged in respect of any dividends paid by the company in the same or any subsequent accounting period not exceeding in the aggregate the net amount of the foreign profits after the payment of such foreign tax and to the extent of such relief the company shall not be entitled to amp;duct nor bound to account for income tax in respect of such dividends under Schedule F.
Amendment No. 554, in line 31, at end insert:
(d) if and in so far as any foreign tax chargeable by the Government of such country as the Minister of Overseas Development shall certify to be in receipt of a grant or loan from the Government of the United Kingdom on the profits of a company for any accounting period (the profits in respect of which the foreign tax is charged being hereinafter referred to as "the foreign profits") shall exceed the due proportion of corporation tax chargeable on the profits of such company attributable to the foreign profits the excess of such foreign tax shall be deemed to have been paid rateably according to their shareholdings by the shareholders of such company and shall subject to the provisions of Part XIII of the Income Tax Act 1952, he allowable as a credit against any income tax or surtax charged in respect of any dividends paid by the company in the same or any subsequent accounting period not exceeding in the aggregate the net amount of the foreign

profits after the payment of such foreign tax and to the extent of such relief the company shall not be entitled to deduct nor bound to account for income tax in respect of such dividends under Schedule F.
Amendment No. 768, in line 31, at end insert:
(d) any foreign tax which cannot be allowed as a credit because the foreign tax on any income exceeds the corporation tax on that income shall be allowed as a credit against any income tax payable under section 43(3) of this Act on that income when distributed, but the maximum amount of the credit allowable under this paragraph shall not exceed the difference between fifty six and a quarter per cent. and the corporation tax.
and Amendment No. 764, in line 31, at end insert:
(2) Where in any accounting period an investment company, as defined in section 53 of this Act, has a surplus of income arising from its investments in any territory outside the United Kingdom over the income on which it is charged to corporation tax, the surplus shall be available for the grant of double taxation relief against liability to tax under section 43(3) of this Act.

Sir Edward Boyle: I beg to move Amendment No. 556, in page 75, line 31, at the end to insert:
(d) if and in so far as any foreign tax chargeable on the profits of a company for any accounting period (the profits in respect of which the foreign tax is charged being hereinafter referred to as "the foreign profits") shall exceed the due proportion of corporation tax chargeable on the profits of such company attributable to the foreign profits the excess of such foreign tax shall be deemed to have been paid rateably according to their shareholdings by the shareholders of such company and shall subject to the provisions of Part XIII of the Income Tax Act, 1952, be allowable as a credit against any income tax or surtax charged in respect of any dividends paid by the company in the same or any subsequent accounting period not exceeding in the aggregate the net amount of the foreign profits after the payment of such foreign tax and to the extent of such relief the company shall not be entitled to deduct nor bound to account for income tax in respect of such dividends under Schedule F.
We pass this afternoon, after the amusing interlude a little earlier, to a fresh aspect of Corporation Tax, namely, the treatment of the overseas earnings of United Kingdom companies operating abroad. I think that it is true that no aspect of the Finance Bill has caused more concern than the Chancellor's decision to restrict the relief on overseas taxes paid by these companies to the Corporation Tax alone. This is clearly a highly important decision which


will add £100 million to the tax burden of companies operating overseas.
I said when I spoke in the Budget debate in April that we on this side of the Committee do not believe that this decision has been properly thought out. This impression has been heightened by a number of arguments which the Chancellor and other Treasury Ministers have used to justify it since Budget day. That is why we are glad of the opportunity to debate the general principle of the Chancellor's decision on this Clause before we debate the transitional arrangements, including important changes which the Chancellor has made since the publication of the Bill, when we reach Clause 79.
I do not want to anticipate the discussions we shall be having on Clause 79. Of course, we realise that the right hon. Gentleman has made some important concessions which are to cost him £20 million a year for the first three years, but the arrangements under Clause 79, including the new concessions, are only transitional and tapered. They will lead to widely differing results from the point of view of individual large companies. Hence it is right that in advance of Clause 79 we should have a more wide-ranging debate on the decision not to allow overspill tax relief for companies operating overseas when, as is the case for most countries, the overseas rate of tax exceeds the Corporation Tax rate.

The Chancellor of the Exchequer (Mr. James Callaghan): With respect to you, Dr. King, the right hon. Gentleman has joined our debates this afternoon and has now said that we are to have a debate on the general principle of this matter. I understand that we are in Committee. It seems that there has been no particular narrowing of our debates over the last 12 days during which we have been discussing these matters. Perhaps some critics might have thought that some of the debates were more of a Second Reading debates than Committee debates. I ask you whether it is now in order to have a debate on the general principle of this matter or whether, as we are in Committee, we should discuss the particular Amendment to which the right hon. Member has put his name.

The Chairman: This is difficult. I understood from the opening remarks of

the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) that he was referring in passing to reliefs to come under a later Clause and that he wants to debate the question of relief for overseas companies generally, but he must relate them to the Amendment under discussion.

Sir E. Boyle: Certainly, Dr. King, I promise you and the Chancellor that I shall devote my remarks strictly this afternoon to the Amendment I am moving. I referred to the fact, I think correctly, that the Amendment I am moving covers a wider ambit than Clause 79. If I go out of order I hope that you will instantly call me back to order. I was intending to mention at the end of my remarks, but I do so now, that the effect of this Amendment is to provide that the excess of the foreign taxes on a company's profits over the Corporation Tax payable on the same profits should be allowed as a credit against the taxes paid by individual shareholders in respect of dividends paid on those foreign profits. I think that I was surely correct in saying that this Amendment raises the general principle of the right hon. Gentleman's treatment of companies operating overseas—[Interruption.]

The Chairman: I do not think there is any difference between the two sides of the Committee. This is merely a question of emphasis.

Sir E. Boyle: I thank you, Dr. King, and I shall proceed with what I was about to say.
I make it plain to the Chancellor that we on this side of the Committee recognise the necessity from time to time for strict control for balance of payments reasons on the outflow of capital from this country. I well recall such a tightening up taking place when we were in power on a number of occasions, in 1957 when we closed the Kuwait gap and in 1961 when my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) was Chancellor.
This is quite a different matter from the long-term tax treatment of overseas investment, including our existing investments. Our case against the Chancellor is that his new tax proposals will affect all overseas investment indiscriminately, and irrespective of its worth from the point of view of our balance of payments position. Nor is this our case alone,


because the Government have had a number of critics on this matter and of them none has been more pointed than Sir Jock Campbell, who can hardly be accused even by the First Secretary as a member of the "great conspiracy" we hear so much about. He said:
The unrelieved application of the Corporation Tax in the overseas field seems to me like trying to kill weeds with sodium chlorate, which kills all growth, when selective weedkillers are available.
When I read that report of Sir Jock Campbell's statement I was reminded of a story I heard of a naval captain in Malta who was invited to attend high mass, and was given a seat in the sanctuary. When the kiss of peace was ruched he was given the traditional salutation: "Pax tecum" and replied, "Et tu Brute", that being the only Latin quotation that, on the spur of the moment, he could remember. I should think that the Chancellor must have felt rather like saying, "Et tu Brute" when he read the remarks of Sir Jock Campbell.

Mr. Callaghan: As a matter of fact I did not, because I had a letter from Sir Jock Campbell saying that he had issued a statement to the Press commenting that the original statement had been made "Three weeks before the Chancellor's welcome proposals" and expressing the view that he had frequently tilted hard at Conservative policy of aid and trade for underdeveloped countries when they were in power and the Press paid not the slightest attention. Now that there is a Labour Government it became headline news. He ended by saying:
I suppose that Labour supporters must live with these mischievous double standards.

Sir E. Boyle: All I can say is that I claim the right, when I agree with a political opponent, to say that the arguments he is proposing are correct. I thought that his statement was perfectly justified.
We consider, as my right hon. Friend the Member for Bexley (Mr. Heath) said, that it is humbug for the Prime Minister to stand up in New York and boast of our immense international investments and say what a standby they are for the £ just at a time when the Chancellor of the Exchequer is bringing in for the future a major tax change of this kind.

Mr. Callaghan: On a point of order. I do not wish to be difficult, but it would be for the convenience of all of us if we knew where we were going in this discussion. We had a long discussion on Second Reading on precisely the general issues which the right hon. Gentleman is now raising. He did not take part then and no doubt he has a frustrated speech which he wants to make now. [HON. MEMBERS: Cheap."] We also had on the Clause introducing the Corporation Tax a long debate on the same general principles that the right hon. Gentleman is now raising.
I am putting it to you with respect, Dr. King, whether it is the intention of the Opposition, as far as possible, to stretch the rules of order to the utmost limit that they can—[HON. MEMBERS: "Oh."]—so as to have another general debate on the whole principle, or are we to get down to a discussion on the Amendments which we are supposed to be discussing and which are to give relief to shareholders against a tax charge on their dividends for overseas tax paid on the company's profits? Hon. Members opposite may not like this, but there are rules of order in this Committee. Some hon. Members who have only just learned this—[HON. MEMBERS: Oh."]—and are—

The Chairman: Order. When the right hon. Gentleman is putting a point of order to the Chair it does not help the Chair or the Committee for noises to be made in support of or against the point of order which he is trying to put.

Mr. Callaghan: Thank you, Dr. King. I have concluded the point of order.
We can go on discussing this general principle until Kingdom come and have debate after debate on it, but there are a number of specific Amendments and I put it to you that it would be for the regulation of our affairs in the best possible way if we were to discuss the Amendments, considering that we have had so many discussions on the general principles.

The Chairman: I am quite sympathetic to the point which the Chancellor has put to me. It obviously would not be in order for us to have a Second Reading debate on each Amendment before us and the principles involved in


the Finance Bill. It would obviously not be in order for us to have a Second Reading debate or a debate on the general principles of the Clause when we are dealing with an Amendment, but I must be fair to the right hon. Member for Handsworth and say that he has a right to refer to some general principles behind the Amendment which he seeks to put before the Committee. I will call the right hon. Gentleman to order if he should get out of order.

Sir E. Boyle: I have no desire to go beyond what is in order. In my experience of Finance Bills, and I have some, there are usually some main issues on which we have a longer than average debate. I should have thought that it would have been the wish of the Committee to have the main debate today on the overseas aspect of the Corporation Tax. When he spoke on 2nd June the Chancellor said of my right hon. Friend the Member for Altrincham and Sale (Mr. Barber):
The right hon. Gentleman referred to overseas investment, and I shall touch on it in passing although we shall get to this Clause in due course."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1742.]

The Chairman: Order. When I am defending the right hon. Member for Handsworth there is no need for him to defend himself as well.

Sir E. Boyle: Thank you very much, Dr. King.
I will summarise our case against the Chancellor's decision under three heads and I will consider afterwards and answer some of the arguments which the Chancellor has used in defending his decision.
First of all, I will put our case. We say that it cannot be right for us to impose a new, severe and indiscriminate tax burden on companies operating overseas, if only for the reason that one of the main restraints on our economic growth since the war has been the too slow growth of our external earnings. I do not think that any hon. Member can doubt the extent to which our rate of growth has been inhibited by the sluggish rate of growth of external earnings since the war. It is, of course, right to be concerned about the cost to the balance of payments of the export

of capital from Britain, but do not let us look at one side of the balance. As my right hon. Friend the Member for Bexley said on 10th May, we need also to bear in mind
… the returns from these investments in exports, in management fees, in other trading invisibles, in making raw materials available to us, as well as in the actual remittances through profits and dividends …"—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 79–80.]
I said in the Budget debate that one section of overseas investment which I thought was of particular advantage to this country was United Kingdom investment in advanced countries, which is closely analogous to United States investment in Britain, where the value of the equipment exported from this country has been greater than the amount of export of capital. Investment of this kind is vital to a country like ours, whose rate of growth is so closely bound up with the growth of external earnings and, therefore, it must be wrong to put up the cost of external investment indiscriminately in the way proposed by the Chancellor.
Next, we want to consider the effect of the Chancellor's proposals on investment in developing countries. Some of my hon. and right hon. Friends have an Amendment down on this subject which is being discussed with this one and therefore I shall not deal with it at length. I recognise that the concessions which the Chancellor has made on Clause 79 will make a little difference here, but surely further investment in industries in high tax-rate developing countries is likely to suffer in the long run just as much whether the chopper falls within five years or within seven years, and it is worth bearing in mind that the Americans have exempted developing countries from actions which they have taken to deal with the balance of payments.
It is also worth remembering what the Prime Minister said about investments in developing countries in the past. In debate on the Commonwealth, in February of last year, the right hon. Gentleman said:
… what we export in the way of investment in the Commonwealth should be more purposefully channelled than it is today."—[OFFICIAL REPORT. 6th February, 1964; Vol. 688, c. 1383–4.]
The right hon. Gentleman also talked about the export of British capital which


we can ill spare for purposes of property speculation in Manhattan. The Chancellor's proposals in the Bill make property investment in Manhattan relatively more attractive than investment in industry in high tax-rate developing countries. I do not criticise a developing country for having a high tax-rate—it may well be justified—but I find it hard to reconcile what the Chancellor proposes today with what the Prime Minister said last year. [Interruption.] I do not consider that I have in any way gone beyond what is reasonable so far on a subject which, by all standards of the past, surely merits one main Committee stage discussion.

Mr. Callaghan: We have already had it.

Sir E. Boyle: Thirdly, the Chancellor's decision on the external aspect of Corporation Tax surely seems particularly unhapy at a time when industry and technology are becoming more international than ever before. As The Statist said at the time of the Budget:
The attitude to overseas investment reflected in the Budget is that of the little Finglander… At a time when the countries of Europe are moving towards real economic unity we appear to be withdrawing into our shell.
I do not believe that temporarily tightening exchange control would have given the same impression as the Chancellor's present measure.
I come now to the arguments which the Chancellor has used to justify his decision and perhaps the right hon. Gentleman will at any rate agree that arguments which he has used in the course of debate are legitimate matters for someone on this side of the Committee to discuss on this occasion. I shall mention four arguments which the right hon. Gentleman has used.
First, the right hon. Gentleman said, in the early stages of the debate on the Budget, that there was a "positive bias" towards overseas investment in our present tax system. I shall not deal with this at length, because I think that the Chancellor will now agree that, at least as regards direct investment, he has overstated the case here. However, looking back over the whole debate so far, I think that the Chancellor himself goes much too far when he almost speaks at times as though overseas tax paid by United Kingdom companies is just in the nature

of a foreign charge. I think that it is, broadly, the right principle that tax should primarily be paid in the countries where the income is earned. But I recognise that the Chancellor has, to some extent, gone back on his original statement that there was a positive bias towards overseas investment in our present tax system.
But there is a second argument which both the Chancellor and the Chief Secretary have very often used with which I wish to deal particularly because I regard it as entirely irrelevant. Both right hon. Gentlemen have made considerable play of the fact that the return to this country on overseas investment is less, on the average, than the return on domestic investment.

4.0 p.m.

Mr. Callaghan: What has that got to do with it?

Sir E. Boyle: With respect, it has got a great deal to do with it. It is an argument which both the right hon. Gentleman and the Chief Secretary have frequently used when justifying their proposals. The Chancellor really ought not to be so cross when I raise this point. If we are to consider the overseas implications of the Corporation Tax, what the Chancellor has said about home and overseas investment must, surely, be relevant.

Mr. Callaghan: The right hon. Gentleman is a fair-minded man, and I trust that I usually am, too. But he has not been here during our debates. This is the first time he has spoken. We have been through all these arguments before, in the debate on the Budget, on the Second Reading of the Bill, in Committee on the Clause providing for the Corporation Tax. It is true that I said I should not say much about it at the time, because we were to come to it later, but, after I had finished, we had a whole day's debate in Committee on the subject, with speeches mostly from the benches opposite.
It is very unfair of the right hon. Gentleman, at this stage, not yet to address himself to a single facet of the Amendment, which is concerned with overspill and relief in respect of underlying tax. That is what I am prepared to deal with and what I came here to deal with. It is grossly unfair that the right


hon. Gentleman should now raise all these general principles again, without beginning to argue the Amendment before the Committee.

The Chairman: Order. I think that we can drop all suggestions of being unfair. I hope now that the right hon. Gentleman the Member for Handsworth, having set out the general principles behind it, will address himself to the Amendment.

Sir E. Boyle: As I see it, Dr. King, the position is this. Under the new system which the Chancellor is bringing in by the Finance Bill, companies will be liable to Corporation Tax at a rate lower than the existing combined Income Tax and Profits Tax, but their ability to claim double taxation relief for overseas tax on their profits will be restricted to the new Corporation Tax rates. I am introducing an Amendment which expresses flat disagreement with this decision of the Chancellor, and it seems to me, therefore, that I am being quite fair in answering the arguments which the Chancellor has used in favour of his proposal and explaining why I consider that we should keep to something a great deal nearer to what one might call the status quo.
I shall not dwell at length on these points, but I submit that I am entitled to answer the arguments which the right hon. Gentleman has used in justification of his proposal as compared with mine.

The Chairman: I agree with the right hon. Gentleman so far. But I ask him now to apply these general observations to the Amendment under discussion.

Sir E. Boyle: Certainly, Dr. King.
To return, the Chancellor's argument about the relative yield of home and overseas investment is statistically incontrovertible, but it is basically irrelevant for this reason. From the point of view of Britain's present economic situation, the relevant criterion must be not just the return on a particular investment but its contribution towards strengthening our balance of payments. The essence of Britain's position today is that, as it were, the marginal utility of an extra £s worth of foreign exchange is substantially greater than the marginal utility of an extra £'s worth of sterling. [Interruption.] I am coming to overspill. In

fact, my whole argument is related to this question.
It should be clear to the Government that I am comparing the Chancellor's proposal with what I am suggesting, explaining why I do not agree with his drastic change, and leading up to the reasons why I believe that we should pass the Amendment, the purpose of which I explained perfectly clearly at the beginning of my speech, namely, to leave us very much more nearly where we were. That is a perfectly normal way of conducting argument in this Committee.
I should like, at this point, to mention what was, I think, one of the most important articles supporting the Chancellor. On 2nd June, The Guardian sought to justify his proposals on the ground that
There must be more productive investment at home if Great Britain is to be modernised and to become prosperous.
That is true, of course. Hence the decision of my right hon. Friend the Member for Barnet (Mr. Maudling), at the end of 1962, to give industry the most favourable system of capital allowances in the world, and hence our decision yesterday, rightly, I think, to spend a considerable time in fighting against the devaluation of the investment allowance. But this does not alter the fact that much of our overseas investment contributes even more directly to the level of overseas earnings than measures designed to modernise our home economy.
It really is a rather strange reversal of form for the partv opposite to judge the relative worth-whiteness of home and overseas investment by the sole criterion of the rate of return. It certainly was not the line taken by the present Prime Minister, when we were the Government, years ago. The point about the relative rate of return on home and overseas investment is, surely, an argument for the continued control of capital exports rather than for the proposals in the Finance Bill.
The Chancellor's third argument is based on the beneficial effect of his proposals on the balance of payments. Here it is noteworthy that, in his Budget speech, as I said at the time, he gave Treasury estimates of the estimated balance of payments saving of the other measures affecting the capital account,


but he was very cautious about the Corporation Tax, contenting himself with the vague phrase, "a marked benefit to our external account". I believe that the right hon Gentleman was right to be cautious and that the benefit to our balance of payments of the Corporation Tax proposals—this is a matter of direct relevance, Dr. King, to whether we prefer the Chancellor's scheme or what I am proposing—will be a good deal more marginal than some people have supposed. I give three reasons for saying that.
First, as I said in the Budget debate, many major overseas investors, such as the oil companies, have very few alternative investment opportunities in this country, as many bodies like the National Institute for Economic and Social Research have pointed out. Therefore, while the new tax burden under the Bill may eventually affect the wherewithal for overseas investment, it cannot have much effect on incentive. But, in so far as the right hon. Gentleman's proposals do deter companies from undertaking overseas investment, one must bear in mind the adverse consequential effects on our balance of payments as well, for instance, the reduced flow of exports generated by overseas operations and the reduced flow of future remittances.
Another factor which the Chancellor is not taking sufficiently into account is the counter-action which other countries may take as a result of his Finance Bill. At present, we receive very beneficial treatment under most double taxation agreements as regards the withholding of tax; but the Chancellor would be very rash to assume that, at least on dividend account, under-developed countries will let us get away with the balance of payments advantages which he hopes will accrue from the Corporation Tax.
I repeat the question which I put to the right hon. Gentleman on an earlier occasion: do we really want to attempt to check all direct overseas investment in this way for the sake of what may be a quite marginal gain to our balance of payments? Of course, if that balance of payments considerations were really uppermost in the Chancellor's mind, there would be no point in penalising existing overseas investment which is a substantial earner of foreign exchange.
That leads me to the last justification that the right hon. Gentleman has put forward, namely, the argument from the principle of the new Corporation Tax. He said at the end of his Second Reading speech:
We cannot expect that tax which is paid by the company to an overseas country should be regarded as discharging the United Kingdom liability of the shareholder. It would make a monstrosity of the system to do so."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712. c. 206.]
In the closing words of his speech then, the right hon. Gentleman was coming close to saying that it does not matter imposing a new penalty on the existing investment of a company if the only result is to make the shareholder pay more United Kingdom tax.
I flatly disagree with the right hon. Gentleman on that proposition, for two reasons. The first concerns the facts. He is wrong in saying that, in the case of large oil companies, the shareholder is really "as redundant as the rhinoceros". That is not so. If one looks even at the past and the figures which the Chief Secretary and others have quoted concerning the last ten years one finds, for instance, in the case of Royal Dutch Shell, that between 1955 and 1964 its shareholders, while they were asked to subscribe fresh capital only once, provided well over £100 million.
The future for the large oil companies will not be like the past. Since the war, the oil industry has provided about 90 per cent. of its capital needs from its own resources but during the next ten years—and again I quote the Royal Dutch Shell group as an example—the proportion of group investment programmes self-financed may well not exceed 85 per cent. The difference between 90 per cent. and 85 per cent., although it may seem a small percentage, can involve very large sums.
If a company has to raise even as much as £100 million in any one year it is worth remembering that the total amount of money raised in the United Kingdom by quoted companies and local authorities last year was £664 million and, therefore, that £100 million is a very large fraction of the total amount of money raised by quoted companies in a normal year.
My second reason for disagreeing with the Chancellor is this. I


beg him to bear in mind that Professor Galbraith, in his lectures, as United States Ambassador to India, on economic development, emphasised the very great importance of the proper treatment in all countries, both developing and those like our own, of large corporations. I believe that the payment to shareholders of a reasonable proportion of net income by way of dividends, the raising of new capital and the orderly carrying through of expanding investment programmes are linked together.
Large corporations simply cannot be regarded as independent altogether of their shareholders. It is in the public interest and not just in the shareholders' interest that a corporation should be able to go to the market on reasonable terms, not least because it is in the interests of our balance of payments that shareholders funds in this country should act, as it were, as a catalyst to attract overseas borrowings.
Here again, I refer to the article in The Guardian, which made much of the fact that only 4 per cent. of the community own shares and said that the needs of the other 96 per cent. were for housing, education and employment. Of course, once we have earned a high national income it is right that a proper share, perhaps even an expanding share, of the extra resources should go to environmental services like housing and education.
4.15 p.m.
As we know, in recent years education has had a rising share every year. But corporations large and small have to earn this income first of all and that is why everyone in this country, and not just 4 per cent., has an interest in British companies being able to find the resources necessary to step up their level of overseas earnings.

Mr. J. T. Price: Would the right hon. Gentleman care to read more of that article? It drew attention in most vivid terms to the fact that many of the large oil corporations have reached the stage in recent years where they were making practically no contribution to Treasury requirements in the form of taxation.

Sir E. Boyle: I have already answered that point. First, The Guardian, like

others, possibly made the mistake of supposing that the next 10 years in the history of the oil industry will be the same as the past. I have dealt with that. With regard to the level of taxation, I believe that it is right that by far the larger proportion of the tax that a company pays should normally be paid in countries where the income is earned. I disagree with those who look upon overseas tax as something which should be regarded just as a foreign charge. Taxation should not be so heavy that large corporations on whom we so largely depend for our balance of payments should not be able to raise capital at reasonable rates.

It is for all these reasons that we believe that the Chancellor has made a basically wrong decision in not allowing overspill tax relief for companies operating overseas.

Mr. Callaghan: What of the shareholders?

Sir E. Boyle: I have explained why I do not believe that one can regard a large corporation as something entirely independent of its shareholders.

Mr. Callaghan: I am anxious to get the right hon. Gentleman down to the Amendment. I would be grateful if he would explain, in dealing with tax on overspill, why he wishes to extend the relief proposed to Surtax payers among the shareholders. We are not talking about the companies at the moment in relation to the Corporation Tax. The Opposition would extend relief to Surtax as well as Income Tax and this would have a tremendous effect on a great many investors, relieving them of even more taxation than at present.

Sir E. Boyle: We provide for that because it seems to us only equitable, although I accept that it is not essential to the principle underlying the Amendment. If the Chancellor cares to accept our proposal but excluding the extension of the relief to Surtax, we would be prepared to consider it.
We do provide that, in rare cases, any additional unrelieved foreign tax should be set against the shareholders' liability to Surtax in respect of the dividends. This seems only equitable and is in line with the general principle that lies behind the purpose of our Amendment. I see no reason why, except for a rather drearily


egalitarian reason, this principle should not be extended to Surtax in the rare cases where the point would arise. Let me also remind the right hon. Gentleman that by specifically limiting the amount of relief to the amount of dividends paid out of the foreign income which has suffered foreign taxation we would be deliberately safeguarding the interest of the general body of the British taxpayers.
I have explained the reasons why we consider that the Chancellor has made a basically wrong decision in not allowing overspill tax relief to companies operating overseas. We believe that our arguments are incontrovertible and we are not convinced by any of the Chancellor's pleas in defence. Of course, we will examine his transitional arrangements in Clause 79 carefully when we reach them, including his more recent concession. But let us be clear that the relief in Clause 79 is tied to the past performance in the best years and even before the taper it will not necessarily enable the shareholder to obtain full tax credit on his overseas income in the current year.
Our Amendment provides, as I have said, quite straightforwardly, that the excess of the foreign taxes on a company's profits over the Corporation Tax, payable on these same profits, should be allowed as a credit against the taxes paid by individual shareholders in respect of dividends paid out of those foreign profits. That seems to me to be a perfectly clear and reasonable principle for the reasons I have explained—that it would make it more possible for important companies to develop in an orderly manner and that here would not be this entirely indiscriminate adverse effect on all foreign investment, including existing investment.
We have moved the Amendment because we believe that it is just and in the national interest, and we have moved it as one more strong protest against the particular scheme of Corporation Tax which the Chancellor has seen fit to introduce.

The Chairman: Before I call on the next speaker, may I say that I have allowed the right hon. Member for Hands-worth to open the debate rather broadly, but that now he has established the principles behind the Amendment I hope that subsequent speakers will address themselves to the Amendment.

Mr. Edward Heath: On a point of order. This is the first time during all the 12 days so far in this Committee stage that we have had the atmosphere which has been created by the Chancellor of the Exchequer, who has constantly interrupted on points of order and asked whether my right hon. Friend was in order. I would like to seek your guidance, Dr. King.
On innumerable occasions so far we have had no discussion on the Question. That the Clause stand part of the Bill, because we have had adequate discussion of the principles involved in Amendments as well as their details. If we are now to have constant interruptions on points of order, trying to bring us back to specific points of Amendments all the time, will it be in order fully to discuss the principles of the Clause on the Question, That the Clause stand part of the Bill? So far, we have made very good progress and we have been congratulated on it every time that the Government have moved to report Progress. However, it will not be possible to make such progress if we are to have this fresh atmosphere.

Mr. Callaghan: Further to that point of order. I think that the right hon. Member for Bexley (Mr. Heath) is forgetting the basis upon which we entered discussion of this matter. When giving your Ruling, Dr. King, will you bear in mind the arrangement which was made about this matter? On 2nd June, on Clause 42 and the Corporation Tax, the right hon. Member for Altrincham and Sale (Mr. Barber), moving his rather narrow Amendment, said:
… I was wondering whether it might be for the convenience of the Committee, Dr. King, if we were to have the general discussion on the Corporation Tax at this stage rather than on the Question, That the Clause stand part of the Bill."—[OFFICIAL REPORT, 2nd June, 1965, Vol. 713, c. 1722.]
The right hon. Gentleman then proceeded to raise, among other matters, the question of overseas taxes and he enunciated exactly the same principles which we have had enunciated this afternoon. I then replied. We went into these details then, so that there has already been a general debate on the subject, although I said that we would come back to it on this Clause. I assumed that there were a number of Amendments, but that after all that had been said in


the general debate, in which many hon. and right hon. Members present this afternoon took part and which concentrated wholly on the principle which the right hon. Gentleman has outlined this afternoon—we went through oil companies and everything else and my right hon. Friend the Chief Secretary replied to the debate—we would not have another general debate today.
If there is a different atmosphere in the Committee this afternoon it is because I believe that it is not right that we should now again go through the general debate which we had on Clause 42, especially as the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) did not discuss what I agree to be the important details of the Amendment which he has just moved. I accept that it is an important Amendment and I shall hope to reply to it, but I have not heard any argument in favour of it.

Mr. Heath: Further to the point of order. Is is not quite clear from the quotation by the Chancellor that my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) was referring specifically to Clause 42 and that in a general discussion of a tax, as we had on the Amendment to Clause 42, one is perfectly entitled to discuss the impact of the tax on successive Clauses in which the principle is set out? I believe that that is the right of the Committee.
The Chancellor has not sat in on much of the Finance Bill. We on this side have made no protest about that, although we could have made a fuss about it at almost any time. We have recognised that he has great responsibilities, particularly at this time, which take him away from the Committee and we have made full allowance for that and propose to go on doing so. But for his part the Chancellor might allow the Committee to continue its debates in the way to which it is now accustomed.

Mr. Geoffrey Lloyd: On a point of order. May I point out to you, Dr. King, that in talking about Clause 42 the Chancellor of the Exchequer was talking about the general principle of the Corporation Tax? This Clause specifically deals with double taxation and specifically with double taxation in regard not only to Corporation Tax, but Income Tax. We hold that one of the

great mischiefs of the Clause is that it damages the United Kingdom economy, because in specifying with regard to the Corporation Tax—

The Chairman: The right hon. Gentleman must not enter into the merits of the case. I would prefer him to keep to the point of order.

Mr. Geoffrey Lloyd: The Clause deals with the question of double taxation and our Amendment is designed to remove this mischief from the Bill. We are entitled to argue this as a very important matter indeed. Those of us who have been in almost constant attendance very much resent the new atmosphere.

Mr. R. J. Maxwell-Hyslop: On a point of order. In a nutshell, is it not the complaint of the Chancellor of the Exchequer that he has himself introduced a Bill with 90 Clauses and that he is objecting to the Clauses being discussed?

The Chairman: That is not exactly a point of order. I hope that we can get on with the business of the Committee.

Mr. Harold Lever: On a point of order. It is by no means my wish to widen this or any other Committee debate, but some hon. Members felt that your earlier remarks, Dr. King, might be construed to suppose that there was one rule of order for the Front Bench and another rule of order for those who did not speak from the Front Bench. May we have your explicit guidance that no such ruling was intended?

The Chairman: I am grateful to one of the Temporary Chairmen for his help. The Chair does not distinguish between hon. and right hon. Members in ruling on matters of order.
To return to the issue which has been raised, obviously certain general principles must crop up in certain debates in the Committee stage of the Bill. I allowed the right hon. Gentleman to open the debate rather widely because certain wide issues of overseas trade and Corporation Tax arose on the Amendment. All I said was that, the debate having been opened rather widely, we might now concentrate on the Amendment itself, and that is what I was hoping the Committee would do.

Mr. Robert Carr: On a point of order. The Chancellor of the


Exchequer referred to what was said by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) on 2nd June about overseas investment. However, the Chancellor himself went on to say, of overseas investment:
… I shall touch on it in passing although we shall get to this Clause in due course."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1742.]
I submit that that was a fair indication that what was in the mind of the Chancellor of the Exchequer and in the minds of my hon. Friends was that we should have a debate on overseas invesement on this Clause.

The Chairman: I think that we might row leave all the points of order alone and get on with the debate.

Mr. Sohn Peyton: I am very glad to have the opportunity to support the Amendment, but I should like at the start, without repeating the arguments which we have just heard, to make sure that I understand the position correctly. The Government have proposed a quite novel principle of taxation—that company shareholders are to be exposed for the first time to a measure of double taxation. The Amendment is designed to stop that. It is, therefore, a matter of widespread principle and I shall find it very difficult to keep my remarks from ranging over fairly broad issues, although I wish to confine them mostly to the bearing of the Government's proposals on the oil companies and the need to protect the oil companies from the effects of the Government's proposals. We believe that the Amendment is well designed to do just that.
I have no desire whatever at this stage to raise the temperature of the debate, but it is quite extraordinary that the Chancellor of the Exchequer should wish to send out from this Committee the message that in some way or other he wishes to discourage discussion. I do not think that any hon. Member on either side of the Committee enjoys a better-earned reputation for fair-mindedness and courtesy than my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). It seems to me, therefore, strange in the extreme that on one of the Chancellor's very occasional visits to the Chamber—

4.30 p.m.

Mr. Callaghan: I let what the right hon. Gentleman the Member for Bexley (Mr. Heath) has said pass, but I think that, on reflection, he will agree that although I have not always taken part in the debates, I have been in attendance in the Chamber—apart from yesterday, when I was absent until ten o'clock for reasons which he privately accepted—for a considerable time and heard a great deal of the argument.

Mr. Peyton: I do not think that anyone on this side of the Committee would wish to make charges against the Chancellor on this or any other ground, were it not for his extreme conduct this afternoon and his plain discourtesy during the speech, a perfectly temperate, calm and reasonable speech, made by my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). One of the things that really worries us on this side of the Committee is the Chancellor's attitude to these proposals. In the course of his remarks in the debate on Clause 42 he observed that in a few years' time hon. Members would come to wonder what all the fuss had been about. It is just that which makes me feel a deep concern as to what is in the Government's mind and whether they have thought adequately about the effect their proposals are going to have.
They seem to be a strange combination of innocence and flippancy, garnished round with a smattering of reformist zeal, without any adequate thought whatever having been devoted to the matter. There is also attendant upon the whole of these proposals a dislike and suspicion of international operations, particularly when they are conducted by oil companies, and of course there is this, to my mind, a very foolish contempt for shareholders. What really worries me is whether the Government have considered, although Ministers have paid lip-service to it, the immense contribution made to our balance of payments by the two major British oil companies. It is an immense contribution. There is no other country in the free world without any indigenous resources of its own that is able to import its oil requirements with so small a burden on the balance of payments. That this is so is almost entirely due to the worldwide operations of Shell and


British Petroleum. As a result of the Bill and the Amendments that have accumulated round it, Shell has been singled out, whether by intent and design or by accident I know not, but it has been singled out for very bad treatment indeed.
This is a tremendous company responsible for the import of 30 per cent. of our oil supplies. It exports both oil products and chemicals and is also responsible for the export of a considerable amount of United Kingdom equipment and goods. I hope that the Chancellor will also take these arguments seriously while he is here. This company receives in London immense remittances for supplies both to group companies and in respect of sales made to others overseas. It also receives large payments in respect of shipping and insurance. It receives dividends from operating companies and in addition to that it holds an immense amount of money in London as central funds.
The Chancellor keeps talking, Dr. King. If he wishes me to give way I will do so.

The Chairman: If Members on the Front Bench on either side really misbehave the Chair will call them to order.

Mr. Peyton: I am grateful. I was driven to attract the attention of the Chancellor to arguments which are taken very seriously by some people even if not by himself.
The point I would particularly invite his attention to is that during recent years the contribution of these companies to the balance of payments has been immense. In the case of Shell, in 1961, it was £98 million, in 1962, £80 million, in 1963, £81 million and, in 1964, £19 million. That figure was much lower (a) because there was intensified pressure on profit margins and (b) because of a particularly heavy item of foreign investment during that year. I hope that the Government will give due weight to the fact that over the past 10 years this immense company has imported into this country £1,200 million worth of oil, mostly crude. It has done so at a cost to our balance of payments of an aggregate outflow of £150 million and that by any standards is a very great commercial

achievement which the Government at least should respect and honour and not treat with such disdain as they appear to do.
I turn for a moment to the other main British company, British Petroleum, making, incidentally, a note that few British Governments have ever made such a splendid or more fortunate investment as one of the Government's predecessors did in this case. This company earns £100 million a year in overseas trading. By means of its exports it has made a great contribution to British export. It is also engaged in an enormous refinery industry. It has a large tanker-building programme and I do not know what the effect of these proposals will be upon that programme but it is an immense programme which has been very welcome.
The company imports into the United Kingdom about £40 million worth of oil every year. If those supplies were produced from another company it would be a great deal more expensive than that. I hope that the Government will recollect that oil is an immense international industry of a highly competitive nature. It is conducted almost entirely overseas and it is taxed overseas. The Government now seem to have made up their mind to disregard the intense competitive forces which face the industry and to make a new set of highly oppressive rules.
I am bound to ask, "Whom do they think this will help?" I cannot help feeling the American companies operating in this country and elsewhere must be simply hooting with laughter at the Government's proposals. Perhaps I could read to the Chancellor a quotation from the Petroleum Intelligence Weekly of 19th April of this year. The heading is, "Will U.K. Companies Have to Fight With One Hand Tied?" It goes on:
The surprising thing about Britain's pro- posed new tax measures is that they appear to undermine somewhat the competitive position of British based international oil companies, while offering certain advantages to foreign oil based firms.
This is a foreign opinion. It is one which the Foreign Secretary appears not to hold and I hope that he will give some serious attention to it.
Later in the same article there is the sentence:
U.K. Affiliates of American, European and other foreign oil companies, however, may actually get a tax break under the proposed new system—particularly if they plan heavy new investment locally.
Of course, this is particularly appropriate in view of the North Sea operations.
Perhaps the Chancellor would be able to comment on this and to show that he has at least reacted to these ideas and thought about the problem. The arguments which the Financial Secretary has used in the Committee are very much in the Government's mind in making these proposals. The Financial Secretary has made three main points. First, that the oil companies pay no United Kingdom tax. That is wrong. Secondly, that the shareholder is redundant. Thirdly, that no damage will follow to the competitive power of British oil companies.
I do not believe that any of these three points is justified. Let me take the tax point first. We are here dealing with a large section of the fuel industry, and it is fair to comment, in passing, that no other section of the fuel industry pays any tax at all, but that fact does not seem to commend itself to the Financial Secretary as being particularly worthy of mention. I would remind him, too, that unlike the other fuel industries, these oil companies collect very large sums of indirect taxation on behalf of the Government. Last year, Shell collected £227 million to hand over to the Government, and British Petroleum, in the same year, collected about £121 million. They also paid rates and direct taxation like anybody else. In these circumstances, it is misleading, harsh and unfair for Treasury Ministers to suggest that no United Kingdom tax is paid by the British companies.
I do not wish to repeat the arguments made by my right hon. Friend, but I should like to refer to the question of shareholders. It is quite fantastic to suggest that a shareholder and a company are quite separate entities. One could not exist without the other. Yet we get remarks such as that made by the Financial Secretary that a shareholder does not produce any of a company's finances, that it derives them from its own resources. From whom does that

money come except the shareholder? I suggest that the Financial Secretary is not justified in carrying on this point any further. As my right hon. Friend pointed out, the Shell shareholders provide £126 million or so, which makes them quite a useful rhinoceros. It is a pity that there are not a few more like them.
I come to the next point upon which the Financial Secretary relied, that no damage will be done by these proposals to the competitive power of British companies.

Mr. Callaghan: Hear, hear.

Mr. Peyton: The Chancellor seems so convinced; I hope that he will listen and see whether somebody else may not be right, and not he.
I do not think that anybody would think of owning racehorses and then making sure that each and every one of the horses was at the top of every handicap carrying top weight with no chance of winning. One would have thought that in what is essentially an international and highly competitive industry, the aim of the Government would be to fortify as far as possible the companies which operate from these shores to our own great benefit. But no. Here is the Chancellor singling out our own oil industry for quite exceptional burdens.
The Financial Secretary suggested that the British oil companies are in some way privileged as against their American counterparts. I ask him to get the combined resources of the Treasury—I suggest that some prejudice is lurking in that building—to examine how the gross incomes of international oil companies are disposed of.
According to figures that I have here—he can challenge them if he wishes—the percentage of their gross incomes which went in taxation in 1964 are as follows: Standard Oil of New Jersey, 26 per cent.; Socony, 25 per cent.; Texaco, 22 per cent.; Gulf, 23 per cent.; Shell, 36 per cent.; B.P., 43 per cent. On net income the figure for Standard Oil is 43 per cent., for Gulf 41 per cent., and B.P., under the new tax system, paying the same dividend, 70 per cent.
4.45 p.m.
Those figures are clear enough—there may be small discrepancies—to show


that the Chancellor is penalising a very vital British industry which has made immense contributions to the welfare of this country. He is doing so wantonly and he has closed his ears to argument. I am prepared to admit that by the transitional provisions he has given a useful measure of temporary relief to British Petroleum, but, because of the previous shape of the Shell operations, which was a fair and legal one, he has penalised Shell and its shareholders to an intolerable extent.
Despite the temperature in which the debate started—I am sure that the Chancellor is under a very heavy strain; it must he a tiresome job seeing through a Finance Bill—I hope that the right hon. Gentleman will accept that this is not a political argument, directed at him in a spirit of party rancour. I am sure that this argument could be put so much better by many people other than myself, but I ask him to accept that we believe that he is making a serious mistake and I hope that he will take every opportunity that is left to him to remedy or at least to ameliorate it.

Mr. J. Grimond: It is true that we have had considerable debates on the principle of the Corporation Tax both on Second Reading and on Clause 42. On Clause 42, the debate was properly conducted under the guidance of the Chair, and it surely cannot rule out further discussions on a particular aspect of Corporation Tax dealing with double taxation and taxation of overseas companies, which we are pursuing today.
As the Chancellor said, one of the points at issue is whether shareholders should be given some relief for double taxation arising from the overseas operations of their companies. He further said that this raises the question of one's view of shareholders. I do not accept the view that it is desirable for the country that the economy should be run by self-perpetuating corporations many of which appoint their own directors and are more and more divorced from their shareholders. I agree, however that this is a wide point and that it would be improper to go too far with it.
Let us look at the situation as regards the Government's policy at this time

The Chancellor is entitled to say that it is folly if this country is in deficit to borrow short and invest long. The simple way out is to use existing machinery, to curtail new investment overseas or to make it more selective so as to invest in highly profitable enterprises only. That machinery exists and, as far as I know, no company has been enabled to undertake any large investment abroad without getting the authority of the Bank or, indeed, of the Government.
But what the present proposals do is to cut the return—that is to say, the return to shareholders—on existing investment overseas. I think one is entitled to spend a little time on this subject because it has caused the gravest anxiety in the boardrooms of many of the most important companies. Shell has been mentioned. There are also Bowaters, I.C.I., Hudson's Bay Co., Rio Tinto and mining companies. It is apparent from talking to the people in charge of those companies that though they owe an obligation to their shareholders, they are not simply concerned to be able to distribute bigger and bigger dividends. They are concerned about what this may do to the whole operation of British business overseas, and this is of importance to the country, whether we are shareholders or not.
Further, the word "shareholder" includes pension funds, charities, and. indeed, the Government themselves are contemplating setting up a unit trust. Therefore, the shareholders are not some rich minority who may be safely persecuted. They are, in fact, an integral part of the structure of the economy, as I know the Chancellor admits.
All the people concerned with these companies to whom I have spoken are quite clear that when taking decisions about investment, they must have regard to the effect of those decisions on their dividends. They may not want to increase their dividends, but they must hold them at a reasonable level, not only because they are under an obligation to their shareholders, but because, even if they are to raise new money from financial institutions, it is vital to them to be able to tell those institutions that they can raise a proportion of the new money, if they have to, on the market. If they cannot do that, they have to pay far


higher rates and they will not be able to raise money outside this country.
One of the striking features about these large companies to which I am referring is the amount of money that they have raised outside this country which is now earning dividends, not only in cash, but through services which are drawn out of this country because these companies are British.
Therefore, it is unrealistic to believe that the choice made by a board of directors can simply be to keep up its retentions, its ploughback and its investment by continually cutting its dividends. Theoretically, it may be possible, but as a practical proposition none of those to whom I have spoken regards it is possible. We must have regard to how decisions are taken in a mixed economy in which we all have deep interest.
The principle so far has been that where the United Kingdom rate of tax is the same as or lower than that of an overseas country in which a company or a subsidiary operates, it pays no British tax: that is to say, up to the rate of British tax—56¼ per cent.—it gets relief. It pays its taxes overseas.
What was the justification for this system? The whole Committee would, I think, accept that a country is entitled to tax a company which is making most of its wealth within its borders and that in the case of the new countries of the world this is important. No one, I think, would dispute this. Secondly, this arrangement puts a company which invests abroad in no better position than a company which invests at home.
On 2nd June, the Chief Secretary said that
all these companies investing abroad have been on favoured terms."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1846.]
I do not quite know what the right hon. Gentleman meant by that. They do not appear to me to have been on favoured terms compared either with investment at home or their competitors overseas. The right hon. Gentleman went on to say that the yield on a domestic investment was 15 per cent. and on an overseas investment 4 per cent. I think that the 4 per cent. is arrived at by saying that the gross yield is 8 per cent., of which 4 per cent. is ploughed back and 4 per cent. is brought home for distribution. I take it, however,

that that 4 per cent. is after payment of the foreign tax. I am not sure, therefore, that it is the figure which should be compared with the 15 per cent. gross earnings on investment at home.
The Chief Secretary went on to point out that the 15 per cent. was available and chargeable to tax here, which was then used to maintain the social services, defence and other necessities. That is true and it is an important and valid point. The right hon. Gentleman made no allowance, however, for the fact that money invested overseas, although it may bring in a lower rate of return, makes a great contribution to the balance of payments.
I do not want to go into this in detail; the figures have been given again and again and they have been made known to the Chancellor in innumerable memoranda. One group of the extractive industries have brought in £1,800 million in 10 years and one group of industrial concerns overseas have brought in £980,000. Innumerable examples can be quoted, from Hudson's Bay, Shell, and so on, not only of the direct benefits from overseas investments, but of indirect benefits in insurance, in the use of British patents and skill, raw material and of the subsequent trade which that brings us. These must be taken into account. Such operations also benefit the overseas countries.
The Chancellor has properly pointed out that private investment in the developing countries has been decreasing, but I am not at all clear that this is a reason for attempting to decrease it further. It may be pertinent to control new investment, but I am not certain that one should penalise old investment simply because one wants to shift the emphasis at the present moment.
Here I would say—this is relevant to the general debate because we shall debate later the Chancellor's transitional proposals, which I regard as important—that we should spend a moment or two again today in considering whether it is really wise for this country, when the whole world is moving towards a more international pattern of trade and when countries are becoming increasingly international, to confine our economic activities more and more within our own boundaries.
The Chancellor has argued again, and it was said also by his right hon. Friend the Chief Secretary, that not only have


companies operating abroad had a favoured position as against home investment—I do not believe that they have—but that their shareholders have had a favoured position, too. The Chancellor has said that in certain cases they have been able to reclaim tax which has never been paid. This arises from a Report of the Comptroller and Auditor-General and, again, it is a serious point and one which the Committee should examine and put right. It is a valid point but not, perhaps, of great moment in the sense that a lot of money is involved.
It is, I understand, possible for a dividend warrant to be issued saying that tax has been paid when, owing to the position of the company, no tax ultimately was chargeable. It is also possible, I believe, for the shareholder to reclaim tax on his personal tax position on that warrant. I am also told that all that is needed is a running record between the company and the Inland Revnue and that the Inland Revenue has prepared a scheme which would have put an end to this type of evasion.
It is a curious fact that if a person is very rich, with an income of £14,000 a year—which few people in this Committee have—it appears to pay him to invest overseas in America. One of the places, curiously enough, which is both gaining under the present system and, I understand, will continue to gain under the new system is South Africa. Owing to its low rate of withholding tax, it may pay people to invest in South Africa, but only marginally and for an individual investor only if he has a substantial income, of over £7,000 a year. These are points which have been made and which should be answered. There seems to be some validity in them. I never regard them as sufficient reason, however, for a general extra charge upon all investors and all shareholders in companies operating overseas.
I wholly accept the argument of the hon. Member for Yeovil (Mr. Peyton) that the oil companies to which he referred bring in a great deal to this country and collect a lot of tax on behalf of the Government. Here again, however, the Government have a point of substance. These companies carry on immense operations in this country and yet they do not pay any contribution

to the British tax system. There is a case for saying that a company which carries on large operations here and which takes advantage of the various services which are provided out of taxation in this country should pay a contribution at least towards the general running of the country.
Again, however, would not the way to overcome this be to try to consult those companies about whether a scheme cannot be agreed? This is well known in the oil world; it is what goes on continuously in the oil-producing countries. That, however, is insufficient reason for what might be the serious effect of this shift in our taxation system.

Mr. J. T. Price: Is the right hon. Gentleman seriously suggesting from the Liberal benches that the House of Commons should initiate legislation to give discriminatory tax concessions to particularly selected industries, because they have such problems that they should be excluded from the general taxation provisions of the country, and provided for in a special way? This seems to be a most illiberal doctrine.

5.0 p.m.

Mr. Grimond: I do not think that I was suggesting anything of the sort. But whether Liberal or not, the number of exceptions, allowances, and so forth, made under our tax system, is legion, as I am sure the hon. Member knows. There is no end to the making of such exceptions. Nor is this something produced by the Liberals in 1965. It has been done by every party in the last 50 years at least. However, I was not in fact suggesting that. What I was suggesting was that investment abroad is being put at a disadvantage and I think the Committee has got to get that into its head.
My point—and no doubt the Chancellor will reply to it—is that what we are now doing is not correcting an advantage which overseas investors have had, but what we are doing is a positive disincentive to future investment overseas and a penalty to existing investment. This is what, I think, the Chancellor wants to do. He wants to shift the emphasis. Unless he were doing that there would be no point in the Clause at all. Unless he were definitely disfavouring—if that is the right word—overseas investment there would be no


point in the Clause, because that is the point of it. That is the point at issue: do we want to deter overseas investors permanently?
I would concede, and I think that many people would, that there is a temporary case for putting a check on overseas investment. Overseas investment accounted for some half of the adverse balance last Year. Certainly, there is a case for that, but not for writing into our legislation a permanent disincentive to investments overseas.
It has also been argued that this will put the shareholders in those companies in a position of equity if not in a position of equality with home shareholders, and that in investing overseas one must expect overseas taxation as a charge on one's earnings. But this is not so. Take two hypothetical cases, of companies operating on 40 per cent. corporation, one of which invests in a country with a 50 per cent. rate of tax, and both ploughing back 30 per cent., the home one would he left with 18 per cent. for its shareholders and the overseas one with only 12 per cent. So I think the case, so far at any rate, is clear that overseas investors will be put at a disadvantage.
I do not want to go back over all the principles behind this. I have made it dear that I differ at any rate with the Chancellor in the emphasis he puts on the importance of shareholders. I do riot entirely dissent from his view that there is nowadays a distinction between the shareholders and the company, but the point I am making is that they cannot be dissociated too far. To say that shareholders can be reduced to a minimal dividend of 2 per cent. or whatever it is is not the way our system works, and it could not work.
I would agree that there may be loopholes which ought to be stopped up, and that there may be a case for a temporary check on overseas investment, but I do believe that this Committee should not accept the view that at this stage in its history this country should go back on its long tradition of overseas investment as a permanent part of our policy. I know the Chancellor does not intend to do that entirely. Of course he does not; he intends a certain amount of it to go on; but from all the conversations I have had with people concerned in this as practical men I believe that the effect of this

Clause will be much more serious than he anticipates. Of course, we cannot now debate transitional arrangements but I understand that during the transitional period there will be a full-scale inquiry not only into the effect on exports, etc., of investment overseas but also into the incidence of taxation, whether in fact overseas investments were unduly favoured or will be unduly disfavoured. Though we cannot debate these things now I think they are relevant to this Clause, even though we must take the Clause as it now stands. It is only fair to the Chancellor to mention these arrangements as they will help. But from all the inquiries and conversations I have had, this Clause is having a most disturbing effect on the sort of British industry, on which we are bound to depend a great deal in general and indeed over the balance of payments.

Mr. Harold Lever: I agree with many of the principles enunciated by the right hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond). I think he is fair-minded enough, in his anxiety to discuss this dispassionately, to see that the Chancellor's intention here in changing the taxation system in relation to overseas earnings was, at this period of our economic development and our financial difficulty, to cause a closer, a more exact scrutiny to be observed in relation to new overseas investment. I do not think anybody should burke that issue however passionately one is in favour of overseas investment.
I yield to none in respect for the efforts of those great enterprising companies which have gone overseas and hazarded much in terms of effort to the advantage of our country, and I yield to none in my anxiety to see that they receive fair treatment. Nevertheless, as I have pointed out before, and as I shall point out briefly again, it is idle to lament the necessity to restrict to some extent overseas investment in general, and in so far as the Amendment is directed to reducing the disfavour to overseas investment I think it cannot be supported.
For this reason, what we have to lament is not the Chancellor's measures to cause a closer scrutiny of overseas investment. What we ought to be lamenting is the absence of the export surplus which permits and finances overseas investment, which most people here would very much


like to see promoted. We must get the order of prorities right. To lament the reduction in overseas investment when we have not got an export surplus, when in fact we are running a considerable export deficit, is really definitely a misconception of the orders of priority. We must get an exports surplus first, and then the country can decide whether the minority of obstinate and narrow-minded people who are against overseas investment ought to be encouraged, or whether the great majority of us, who include the Chancellor and probably every member of the Government, who are in favour of promoting overseas investment, should find the means of doing it. I said on Second Reading that I agreed in general with the need to put a closer eye on our current overseas investments, but that does not, of course, involve in any way any penalising of existing overseas investment.
It has been represented that the Chancellor has a vicious disposition and that, though happy to bite at home investors from time to time, nothing pleases him so much as an opportunity to bite the oil companies and their shareholders. This myth has been completely dispelled by the Chancellor's reactions and his very sympathetic intentions which he has manifested to help overseas investors by these reliefs. Whether these reliefs go as far as some of us would like to see them go is another matter which we shall discuss on a later Clause, but what I wish to emphasise is that we shall not have as useful a discussion as we might in this Committee if we are going to project this false picture of the Chancellor as an ogre with a passionate desire to injure companies investing overseas, the great names and enterprises which have been spoken about, as an ogre who is anxious to injure the larger shareholders. Those who intend to give such a picture of the Chancellor are doing a great disservice to those companies themselves overseas, because overseas they will not be able to trade so well and their reputations will suffer if it is supposed, even wrongly, that they are pariahs detested by the Government of whatever party is in office in this country. I hope we may continue our discussion on this question in a way which does not project this false picture of either the Government or the Chancellor.
One of the things wrong with this Amendment is that, unfortunately, it does not take into account the need in general for a closer scrutiny of overseas investment, that is to say, whereas the Chancellor could have been criticised, especially before he made these concessions, and perhaps to some extent now, for penalising existing investment, the Amendment indiscriminately allows overseas investment to take place and grants very considerable relief to companies and their shareholders in respect of any investment whether already made or to be made in the future. For this reason I cannot support the Amendment, because I am not in favour either of penalising existing investments or of diminishing the Chancellor's purpose of scrutinising with some care new investment in the future. The Amendment does not qualify for acceptance because of its indiscriminating character.
With his characteristic intellectual honesty, the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) recognised that we should have some general provision discouraging new investment at the present time. What he objected to was what he called the indiscriminating and general character of doing so by means of the tax system. But again he conceded that the alternative was to stiffen and extend exchange controls and the overseas export of capital controls. Since the war we have had an interesting debate as to how to achieve our social purpose—whether we should do it by full controls of this kind, or by more general and practical measures such as the Chancellor is taking. I favour the general controls, because they do not place an added and insupportable burden on a limited supply of very skilled manpower.
The weakness of the right hon. Gentleman's criticism, and of his support of the Amendment, is that it allows the indiscriminate investment to go on. He invites the Chancellor to set up a more detailed and effective control of the export of capital. If we accept the Amendment we will have to set up a vast extension of the controls for the export of capital, and this is what it would be undesirable to do at the present time when we have so many calls on our skilled management. We need to simplify administration and


not complicate it by widening it in this way, and for this reason I cannot support the Amendment.
The hon. Member for Yeovil (Mr. Peyton) said that the Amendment was designed to stop the double taxation of profits, once in the hands of the company, and once in the hands of the shareholder. I shall not go into this interesting metaphysical and juridical debate as to the identity of shareholders and the company itself, but I know that it is a matter of extreme interest to hon. Members opposite. They have been grapping with it ever since the Finance Bill came to be debate in Committee.
I hope nobody will think that I am disrespectful of other people's speeches more than I am of my own, but I cannot say that the problem is any nearer solution now than it was when we first started on our discussions. It is, however, enough for the purpose of this discussion to say that companies regret the change in the tax system although it may be said to affect their shareholders as it affects their own business, and it would be unwise in the highest degree to pin tie hon. Gentleman's argument to the idea that this is not affecting the company at all, but what the Amendment is proposing is a concession to shareholders and not to the company, and it does not affect its position. This will not help. I know that this is rather the official Treasury view, but it is not a sound view, because the simplest test shows that the reaction of the companies themselves illustrates that they are affected by tax changes and raises the problem as to how we should act in relation to the concessions which the Chancellor has made.
My first point on that is that the concessions are very substantial. In many cases they carry over companies for three years, completely unaffected by the tax changes. With respect to the Chancellor and to right hon. and hon. Members who have drawn attention to the gravity of our position, including the Leader of the Liberal Party who talked about permanent changes in the tax system, perhaps I might point out that this Committee is not in a position, within the constitution of the country, to make permanent changes in the tax system. All this can be looked at again in the House next year, and the

year after. As the Chancellor has made generous provision for three years, I for my part, holding as I do strong views on this subject, would have been completely satisfied had I been sure that the provisions covered all companies for three years and did not cover only some of them.
5.15 p.m.
I would have been unqualifiably satisfied, in the circumstances in which we find ourselves, if the Chancellor had met the case against him of penalising investments by saying that for the next three years the provisions would apply as fully to some companies as they do to others. I am not keen on mentioning names, but British Petroleum would appear to be unaffected in its activities for the next three years, whereas the Shell Company appears to be not so well placed in this respect.
While I reject the Amendment, for the reasons which I have given, and although I welcome the Chancellor's concessions on this matter because I think that they have shown a proper spirit of fair-mindedness by changing a tax which adversely affects many overseas companies, I hope that he will not be inflexible and that he will see whether he can so arrange it that those companies which for one reason or another do not gain anything like the help over the next three years which the Chancellor intended to give them do in fact receive some assistance.
I have often been accused, and it is particularly dangerous when we come to discuss the position of the oil companies, of uttering compliments to my right hon. Friend in the nature of an emollient or a lubricant to make palatable to him the criticisms which I have sometimes felt obliged to make of the provisions of the Bill. Having criticised the Bill fairly frequently, I feel a degree of resentment when I hear criticisms of my right hon. Friend's reaction to the Bill. I have taken part, as have many hon. Members on both sides of the Committee, in deputations to the Chancellor, not merely in the House, but outside, too. I have found him ready at all times to listen, to make efforts to be impartial, without limit of patience and intellectual effort to take the point that we were trying to make on very technical matters on which a


Chancellor is not necessarily obliged to become expert. He has been prepared to suffer these almost unendurable complications to give fair consideration to the case that we have made. I think he will be illrewarded if snide remarks are made about his occasional absences from the Chamber.
I cannot support the Amendment because, in a sentence, it is indiscriminating in its effect as between existing investment and new investment. It does not take into account the nation's need, which at this time is to control the flow of new investment capital, until such time as we have the export surplus which will finance, permit, and make desirable that new investment. In those circumstances the Amendment is not to be supported.
On the other hand, I welcome the Chancellor's concessions wholeheartedly. I think that they go a long way to help the companies most affected by this change in our tax law. I hope that my right hon. Friend will be able to make even further adjustments if a case can be made for them to help those companies which have not fully benefited from these concessions.

Mr. R. H. Turton: The hon. Member for Manchester, Cheetham (Mr. H. Lever) said that we on these benches regard the Chancellor as an ogre. In fact, we regard the Chancellor as one who, with insufficient preparation, and acting on bad advice, has created a blunt instrument that is going to do grave damage to the whole economy. That is our charge against him. Nor, indeed, do we suggest that he is biting hands. We associate that with the First Secretary, and not with him.
I cannot think that the argument which the hon. Gentleman has used, that the Amendment is wrong because the Chancellor, by these provisions, is making an exact scrutiny of our overseas investment, can be correct. Surely nothing is less discriminatory than the Chancellor's replacement of the Section 201 relief by the relief offered in Part I of the Fifteenth Schedule. It certainly penalises all investors. There is a strong case for some measure of discrimination in overseas investment. The balance of pay-

ments is such that, by exchange control or other investment control, we should steer investment where it is most needed, not merely in our material interests but in the interests of the nation. But if we are not going to use that method and are going to use, instead, the Chancellor's overall penalising of overseas investment, we must have some measure such as my right hon. Friend suggests.
I want to speak not to the Amendment that has been moved but to Amendment No. 555, in the names of myself and my hon. Friends, which is being taken with it. The Chancellor's Corporation Tax proposals for overseas investments have undoubtedly caused consternation throughout the Commonwealth. Consternation has been expressed in nearly every Commonwealth country. It is felt by these countries that these provisions will damage their interests, at a time when most of them are finding it very difficult to develop their resources and have been looking to Britain to help them do so.
My right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) recalled the speeoh made by the Prime Minister on 6th February, 1964. No doubt he chose an extract that was applicable to his Amendment, but there was another very pertinent part of that speech, dealing with the Commonwealth, in which the right hon. Gentleman made ten points, the third of which was
To fulfil Commonwealth requirements for development capital we should agree to expand those sections of our industrial system where existing capacity is inadequate to meet Commonwealth needs—both by incentives to private enterprise"—
I underline that—
and by creating new publicly-owned industrial establishments.
This Clause contains a disincentive to private enterprise. It is true that it is intended to deal not with the position that we are coming to later, in Clause 79—in respect of which I believe the Chancellor has provided a quite inadequate tapering-off—but with the position of the shareholder. If, however, we are providing a disincentive he will not invest. That means that investment in Commonwealth countries will be diminished. This is what is causing consternation.
If the Chancellor will accept the Amendment dealing with those companies


which have Commonwealth tax applied to their earnings either in the form that we have laid down or in some other form, he will be giving an incentive to the investors in Commonwealth countries. That will be especially appropriate today—the day before the meeting of the Commonwealth Prime Ministers' Conference. By action that he could take tonight he could do a great deal to remove the misunderstanding that his Budget provisions have engendered throughout the Commonwealth.
So far the Chancellor has argued that there has been a bias in favour of the investor overseas. If we study the position from the point of view of the investor in the Commonwealth we see that there has certainly been no such bias. In nearly every case, because the Commonwealth country concerned is developing rapidly, the investor has had to pay a very high rate of tax in that Commonwealth country. Up to now, that has been set off by the Section 201 relief. From this date, however, the investor will not get that set-off in respect of Commonwealth tax. Therefore, if he is considering whether to invest in a Commonwealth country or in some enterprise in this country he will realise that he will be much better off if he invests in this country, because here he will have to suffer only British Income Tax, whereas if he invests in a Commonwealth country he will have to suffer both Commonwealth tax and British tax—subject to the provisions of Part I of the Fifteenth Schedule, which give only marginal rdiefs.
I beg the Chancellor and the Financial Secretary to reconsider the question in view of the widespread dissatisfaction that has been aroused over the Government's proposals for dealing with investment in the Commonwealth. Only last week the position of our investments in Australia was recorded by the Australian Treasury. The figures showed that in the last 17 years British investment in Australia has totalled about £A1,200 million, which represented about 60 per cent. of total investments in Australia. Do the Government say that we invest too much in Australia? In recent years the Americans have invested more. The American proportion of such investment is rising as ours is falling. At this time it is important for this country to

increase its investment in the Commonwealth.
As the present Prime Minister said in February of last year, there is certainly a case for cutting down our investment in speculative building in Manhattan, or in similar projects. I believe that the needs of the Commonwealth—and particularly the developing countries—are all-important. That is the reason for the Amendment. The previous Government made certain pledges at the Geneva U.N.C.T.A.D. Conference, where points were put forward by my right hon. Friend the Member for Bexley (Mr. Heath). The feeling generally in the Commonwealth and in the developing countries is that the Government, by their Corporation Tax provisions, have made it very difficult for those pledges to be fulfilled. I therefore ask for a concession either on the lines of Amendment No. 555, or in some other form, to provide special discrimination in favour of Commonwealth investment.

Mr. Robert Maxwell: How does the right hon. Member propose to deal with this point? Our total investment in the Commonwealth is rising—although our investment in Australia is falling—but our exports to Commonwealth countries have fallen disastrously. This cannot be allowed to continue.

Mr. Turton: I am glad to have had that interruption. Let us take the case of Australia. Every year, simply because we have been investing a great deal—we invested £60 million last year in Australia—we have had a favourable balance of trade with Australia. That is also the case with New Zealand. In some years we have had a favourable balance of trade, but in some years we have not. In Canada, where our investment has been falling, we have unfortunately had a very adverse balance of trade.
There is a good case for saying that at the Commonwealth Prime Ministers' Conference we should take up the whole question and point out that if we are investing in the Commonwealth we expect each Commonwealth country to reciprocate by securing us a good return in terms of our balance of trade. That has been done by Australia and that is why the Australians feel so bitter against the Chancellor and his party, because when they are doing all they can to help


the Commonwealth partnership, when they have great commitments in Malaysia, which require a very high rate of taxes, this Government are imposing this disincentive on investment in Australia. If, as a result of this debate, we get some concession for investments in Australia and countries like Australia, I and those who have their names to this Amendment will feel that we have accomplished something.

Mr. Maxwell: This is a very simple point. Do the right hon. Gentleman and hon. Members opposite—

The Temporary Chairman (Sir H. Legge-Bourke): Order. I was not quite clear whether the right hon. Gentleman had concluded his speech or was giving way.

Mr. Turton: I thought that I had concluded my speech.

5.30 p.m.

Mr. J. T. Price: I am sorry that the right hon. Member for Birmingham, Handsworth (Sir E. Boyle) has left the Chamber, because I wanted to offer him a small apology for an intervention of mine during his speech earlier on. He was deploying an argument in support of the thesis behind these Amendments, in which certain quotations from the Manchester Guardian were used. I intervened to remind him of certain other things which the Manchester Guardian has said. I was not quite accurate in that, in so far as I referred to 2nd June issue of the Manchester Guardian from which he was quoting. I have taken the opportunity, in the interval, to get the copy of the Manchester Guardian for 3rd June from the Library. It has, I think, some very important things to say so far as these Amendments are concerned. I was, to that extent, inaccurate. The right hon. Member was quoting from 2nd June and the quotation which I mentioned, relying on my memory, was from 3rd June.
In that issue it said:
The row about the Corporation Tax is deafening and last night's tied vote will add to it again… The Government is proposing to change a situation in which the largest company in Britain (Shell), the third largest (B.P.), and a number of others have paid virtually no British income tax since 1960.

Further in the leading article, the editor says:
For four of the past five years, the" net U.K. rate' at which Shell has been paying income tax in Britain has been one penny in the pound in the fifth year, it paid no"—
Order,order. [Laughter.] With great respect to the Chair, Sir Harry, I have been very strongly provoked on many occasions to interrupt my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), but, of course, my manners have prevented me from doing any such thing. I object if he does it to me while he is sitting down.

Mr. Harold Lever: I may as well say standing up what I said improperly. I apologise for that. I said that Shell paid Id. in the £ in Income Tax for the perfectly good reason that they were paying their appropriate share of taxation overseas, which was in accordance with the perfectly well-established and long-established principles of taxation in this country. There is nothing wrong about it at all. It should not be said as if they were doing something wrong.

Mr. Price: If, by what he has said, my hon. Friend is seeking to rebuke me, I stand unrebuked. I prefer to rely on this occasion on the judgment of the Manchester Guardian—[HON. MEMBERS: "Oh."] Certainly. I have great respect for the Manchester Guardian: I still call it the Manchester Guardian, as hon. Members will have noticed. I am trying not to be controversial, but I can see from the way in which the temperature of the House is going up that if my hon. Friend the Member for Cheetham tries to assist me we shall get into an argument. I do not want to waste time. I want to complete the quotation I was giving.
The article said:
For four of the past five years, the 'net U.K. rate' at which Shell has been paying income tax in Britain has been one penny in the pound; in the fifth year, it paid no tax at all. B.P. paid no tax at all throughout the five-year period"—
B.P. paid no tax at all during this period—
both companies, however, have been able to avoid paying British taxes"—

Sir Alexander Spearman: Sir Alexander Spearman (Scarborough and Whitby) rose—

Mr. Price: I will finish this quotation, if I may—
because Britain, unlike any other major industrial country, forgives shareholders their domestic taxes if their company has already raid taxes abroad. There must be more productive investment at home if Britain is to be modernised and to become prosperous.
I am familiar with the sort of academic argument—

Mr. George Y. Mackie: Mr. George Y. Mackie (Caithness and Sutherland) rose—

Mr. Price: Let me just finish this.
I am familiar, of course, with the academic argument put forward so persuasively on behalf of the City of London from various quarters of the Committee—that, if a company pays taxes abroad it has no need to pay taxes at home. I understand the equity of that argument, but it does not end there. If the company is enjoying the social services of this country, such as the police, the fire brigades, and the educational services, it is perfectly logical and morally right that it should make a contribution to the taxes of this country. All the fevered language and blinding with science which goes on on the other side of the Committee on these occasions will not blind me to the fact that accountants have become so clever in our time that they have erected all kinds of devices for getting out of paying a proper share of taxation. If some group of citizens is escaping its moral liability to pay to the tax revenue of the country, somebody else has to pay more to make up the deficiency—

Mr. George Y. Mackie: As I understand the hon. Member's argument, he is saying that the large sales installations of the Shell Company and others in this country are not paying tax because of some manipulation. Surely it should be for the inspector of taxes in charge to make the case that they should pay taxes and that the accounts were wrongly presented. It is not a question of the tax system.

Mr. Price: Mr. Price rose—

Mr. John Harvey: Mr. John Harvey (Walthamstow, East) rose—

Mr. Price: One at a time. I do not intend to be completely diverted from my argument. In the ordinary courtesy of the House, I shall give way when I feel

disposed to do so, but that is not at this moment. I have said nothing wrong, so I do not need to do so.
On the question asked by the hon. Member for Caithness and Sutherland (Mr. George Y. Mackie), it may seem strange that I as a Socialist—an unrepentant Socialist—for many years in this House should have to tell the hon. Member, who represents one of the Highland constituencies and comes in under the Liberal banner, that I prefer the views of the Manchester Guardian to those of some of the new-fangled Liberals who are putting forward views—

Mr. Emrys Hughes: And asking for more money for the Highlands.

Mr. Price: And asking for more money for the Highlands, as my hon. Friends says.

Mr. George Y. Mackie: On a point of order. Is it in order for an hon. Member to act as the mouthpiece for another hon. Gentleman behind him and repeat his words?

The Temporary Chairman: That is not a point of order. If an hon. Member speaks, he takes responsibility for himself for what he is saying.

Mr. Price: I hope that we can get back on an even keel now. I do not wish to be discourteous or unfair to anybody, but merely to state, as plainly as I can, the facts of the situation as I see them—

Mr. John Harvey: The hon. Member says that he wants to state the facts. I hope that he will state them fairly. Surely they begin with the fact that it was a Labour Government, in the post-war years, which first introduced this principle of double taxation agreements, which have been of inestimable help to developing countries. That is tremendously important, but the hon. Member should also recognise that no Chancellor lives by Income Tax or Profits Tax alone. What of the millions of pounds which the big oil companies collect every year for the Chancellor in taxation of a different type? The hon. Gentleman tried to suggest that they should pay something for fire services and police. But they pay rates. Let the hon. Member be fair.

Mr. Price: The hon. Member is entitled to his own point of view and his own judgment on these affairs.

Mr. John Harvey: It is a question of fact.

Mr. Price: I do not want to speak at length, but if I get much more of this I shall go on for a very long time.
Heavy criticism is being directed against the Chancellor suggesting that he is doing something which in some way is detrimental to the best economic interests of Britain. I am not satisfied that that case has been made out. It is a completely fallacious argument. Does any reasonable hon. Member with experience of the affairs of the House pretend that people of a senior status in the Labour Party are deliberately setting out on a course which would injure the economic structure of the country? We are seeking to reform the tax system of Britain, to encourage people who are worth encouraging and to discourage those who are dodging their fair share of taxation.
It has been said from the Opposition benches in previous debates, to which I listened without saying anything or even attempting to interfere with the debate, that because we are following this policy we are in some way Little Englanders. Nothing of the kind. I entirely repudiate any suggestion that I am a Little Englander. I hope that I have as healthy an attitude towards the outside world as has any other hon. Member, and I am as anxious to promote co-operation, in particular in the Commonwealth, as is anyone.
It is wrong to suggest that we are Little Englanders. We are trying to face the realities of our situation; as a debtor country we are no longer able to employ so large a proportion of our resources in investment overseas. One of the most successful exporters in the world of commerce, particularly since the war, has been Japan—and Japan has done no overseas investment at all in order to get markets. Does anyone wish to controvert that?

Hon. Members: Certainly.

The Temporary Chairman: Order. The debate has been going very wide of the Amendment. I ask the hon. Member at least to confine himself to Britain's overseas investments and not to deal with

the investments overseas of other countries.

Mr. John Tilney: Will the hon. Member explain why Japan has an insurance for private investors overseas and has been conducting this business in quite a big way?

Mr. Price: The Japanese have to have a hedge of some kind if they are prudent business men. It does not get away from the fact that Japan is not regarded in any sense as an important provider of international finance. The hon. Member should not try to put those "phoney" arguments across me, because I will not have them.
I will be brief and will bring my rather rambling remarks to an end with these few thoughts which are germane to the Amendments. The right hon. Member for Handsworth opened the debate in his usual quiet and thoughtful manner which we all respect so much. He said that the purpose of the Amendments was to retain the status quo for the time being for overseas investments—in other words to do nothing about these things on which the Manchester Guardian wrote on 3rd June.
We in the Labour Party, who have the responsibility of Government on our shoulders for the time being, are seriously concerned. Overseas investment in itself might be a good thing for the country if circumstances were more favourable and if our resources were greater than they are, and if we were not continually embarrassed by balance-of-payments problems. Overseas investment on the scale of the past 20 or 30 years has been such that it is running at about £11,000 million; that figure has been quoted in the debate. We are concerned that three tests should be applied to such investments in order that they may be justified. The first is that the investment makes some contribution to the employment of British labour; secondly, that it makes an important contribution to the balance of payments; or thirdly, that it makes a contribution to the British revenue. In so far as much of the foreign exchange has done none of these things, we think that the time has come to bring about a change and to reform the system in the way in which the Finance Bill proposes to reform it.
I apologise for going on much longer than I should have done but for the interruptions. No case has been made out for the Amendments, and they ought to be ejected.

5.45 p.m.

Mr. Geoffrey Lloyd: I begin at once with a point made by the hon. Member for Westhoughton (Mr. J. T. Price) that our overseas investments have rot contributed to the balance of payments, and I urge briefly to the Committee that we should give a great deal more attention to the influence of overseas investment on increasing our exports. The Government should have made a much more detailed investigation of the effect of overseas investment on promoting our exports before they brought forward the Clause, and we therefore suggest Amendments to take away the penalty which the Government propose to put upon overseas investments.
My hon. Friend the Member for Yeovil (Mr. Peyton) dealt with the special case o' the oil companies which has been referred to by many hon. Members, and I will comment on it only briefly. The Minister of Fuel and Power has had the longest official connection with the oil industry. At my time at the Ministry of Fuel and Power, and when I was Petroleum Minister during the war, it was accepted in the Treasury that the exports of oil by the sterling oil companies, although they were not made physically from this country, counted as gross British exports, and in considering what was their value to the country we had to deduct from the gross exports the actual cost in foreign exchange to facilitate production. Oil by volume and by value is the greatest single article entering into international trade today. The operations of these great sterling oil companies constitute one of the greatest export efforts made by this country, even though the oil is not physically exported from Britain.
When I was Minister of Fuel and Power the gross production of oil by the sterling oil companies was equal in value to the total manufactured exports from this country. This should make the Committee realise the great importance of the oil industry, far transcending the interests of particular shareholders. I support what my hon. Friend the Member for

Yeovil said; it is very unfortunate that this blow has been struck at the efficiency of the operations of these great international oil companies which play a very important part in our export earnings.
May I ask the Government to consider one particular aspect which is not so large in scale but which is nevertheless important in detail in considering the effect of overseas investments on our exports and in considering our desire on this side of the Committee to remove the penalty which the Government propose to put upon this kind of activity. I want to refer to something quite different from the oil companies. I know that the Government do not like efficient, progressive private companies. In spite of the lone voice of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), it is apparent that there is a prejudice in the Government against the most successful and progressive companies in this country.
That being the case, the Government may be the more disposed to listen to a case of an entirely different kind. I refer to the Commonwealth Development Finance Company, which was set up after the Commonwealth Economic Conference of 1952 in order to help the developing Commonwealth countries. I want to examine the deleterious effects that this Clause will have on the operations of this concern and that on its help with exports from this country. Although this is an ordinary company in the sense that it is incorporated under the Companies Acts. Although it is a City company, it was formed at the instance of the Governor of the Bank of England at the request of the then Chancellor of the Exchequer to fulfil a public purpose in the Commonwealth. Although it pursues proper commercial disciplines, it has also non-commercial objectives.
At the recent annual meeting it was stated that in past years the company's net receipts of income from abroad when added to capital repayments received on loans made in previous years amounted to 87 per cent. of the capital funds which the company had transferred abroad from investment, and that in looking to the future it could be confidently said that the figure would normally exceed 80 per cent. I ask the Committee to note that that means that of every £1 million of


capital transmitted abroad by this company the cost to our foreign exchange balance is at most £200,000.
But there is this other most important point. It is also stated authoritatively that capital purchases in this country resulting from projects in which the company invest will amount on average to about eight times as much as the net outflow. Thus, for £1 million placed abroad by the Commonwealth Development Finance Company only £200,000 represents a net payment of foreign exchange, but, at the same time, £1,600,000 worth of orders for British machinery are placed by the projects in which the company invests. This is not just an isolated example. Because this is a public company fulfilling a public purpose we have the records extremely well documented, but I suggest that the same thing applies to many other important investments made abroad by other companies.
I especially asked the Commonwealth Development Finance Company to give me rather more details of this matter, and it told me that selecting 12 representative investments made in the last five years to which the company contributed a total sum of £3.4 million, the sponsors of the projects concerned have placed orders in the United Kingdom to a total of £5½9 million for a most diverse array of machinery—just the kind of exports the Government want to help us export—including rubber processing and tyre moulding equipment, machine tools, steel melting and other furnaces, foundry and specialised casting equipment, machinery for processing, spinning and weaving, jute and cotton, machine tools, metal presses, tube forming equipment, rolling equipment of many kinds, and a wide variety of electrical apparatus.
It is also fair to say in this instance, as in many other instances in a wide range of public companies, that not only are there the capital orders placed right at the beginning but demands which recur and continue for replacements, machinery, and even for intermediate products that help to make up the final products. This kind of investment should not be penalised by this Clause, against the effects of which we would, by our Amendments, like to protect the receipts of the Commonwealth Development Finance Com-

pany and many other companies which we believe are actually encouraging exports and helping our balance of payments by their foreign investment.

Mr. Maxwell: I cannot understand how right hon. and hon. Members opposite who purport to represent our business community cannot get straight in their heads the simple fact that it is not possible for our country to borrow short and lend long. No one can do that—we cannot—and no amount of talking, hypocritical or otherwise, will change that very simple fact. We have been suffering balance-of-payments crises over the past 20 years, and they have invariably been due to the fact that we have allowed capital investment in the Commonwealth and alsewhere to run way ahead of our earnings—

Mr. Bernard Braine: And Government spending.

Mr. Maxwell: And Government spending—I certainly concede that. Basically, however, we would not now be in such a terrible balance-of-payments position if the former Administration had taken the kind of steps that my right hon. Friend the Chancellor of the Exchequer is now taking to bring in a disincentive to investment. To do otherwise is just not possible. As we can see, the foreigners who have lent us money short, seeing that we cannot pay our way and finance these capital expenditures abroad, have withdrawn their money from London, and we have no alternative but to go cap in hand to the international bankers to lend us money so that we can pay our bills in the short term and avoid being bankrupt.
All hon. Members must realise that the time has definitely come when we have to put our affairs in order. We have to get the foreign bankers off our back, and we shall do that only by ceasing to lend money that we have not got, money that we have not earned. We need investment and modernisation in the United Kingdom more urgently than the Australians do in Australia.
Hon. Members opposite keep harping on the point that to bring in these disincentives to investment in the Commonwealth or abroad will harm our exports. If that is why they are pressing this Amendment on the Government, they have to answer the following question.


How is it that Germany, France, Italy, the Scandinavian countries, and every other industrialised country have increased their proportion of trade in those very Commonwealth countries where we e re supposed to have enjoyed all kinds of preferences, where our kith and kin E re the managers, and in which we have made enormous investments? The fact is that the proportion and percentage of trade we have been getting into these countries has been falling, so the argument that we should invest there in order to protect our falling trade is obviously quite nonsensical and does not bear examination—

Captain Walter Elliot: The hon. Gentleman has referred to the percentage of trade in those countries, but will he refer to the gross values?

Mr. Maxwell: I do not have those figure in my mind, but they are all available in the Library. The facts are very well known. Great Britain used to be the world's No. 2 exporter. We have fallen behind in the Commonwealth. In the past five years our trade has fallen by about a quarter—

Mr. Braine: I am sure that the hon. Member wants to be fair and accurate. There has been a decline in the proportion of Commonwealth trade and world trade enjoyed by this country, but it is a relative decline and not an absolute decline. In recent years other nations have come along and become competitive, and so on, but that does not mean that our trade with Australia and other Commonwealth countries has diminished; it h as continued to grow.

6.0 p.m.

Mr. Edmund Dell: This is a point of substance and the facts should be made available to the Committee. In the five years 1959 to 1963 in Australia—the main country in which we have invested—we invested £237 million, yet during the whole period our exports to Australia remained stationary.

Mr. Maxwell: I am very much obliged to my hon. Friend. This is precisely the point. It is no good hon. Members opposite ducking this issue. The need for our country to bring in disincentives to investment abroad at least for the next four or five years until we have the foreign bankers off our backs should not

be a party issue. Many right hon. Members opposite were Ministers not long ago. They must know how humiliating it must be to go cap in hand to Governments saying, "Lend us money or we shall go bankrupt." This is not something which should be a party issue. We cannot afford to make these investments by borrowing short and lending long.

Mr. Ian Gilmour: I follow how the hon. Member's argument applies to new investments over the next five years, but how does it apply to investment already made overseas?

Mr. Maxwell: I am very glad that the hon. Member accepts that new investments require a disincentive. I hope that if and when the Committee divides on this Amendment he will go into the Lobby with us and vote in favour of the Chancellor's proposal. It is extremely difficult and tricky from a taxation point of view to separate old and new investments. Because of this technical position it is not possible or necessary to separate them.

Sir E. Boyle: The hon. Member has been talking about the next four or five years, but the proposal which the Chancellor has put forward will not take full effect for seven years. During the next three years, in a rather haphazard way, temporary provisions are to be provided. Our complaint is that this will have a very major long-term effect and not one just for four or five years. We should look at the question of whether for the long term this is the sort of way in which we want to move.

Mr. Maxwell: What the Chancellor wants to do, and what this country needs to do, is to give notice to our business community and administrators that the time has come to call a halt to making these investments abroad because we as a country cannot afford them. When we have earned a surplus on foreign exchange and have a surplus to invest, it will be up to the Government—as my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) said—to say that we can now afford to encourage investments abroad. We want to put everyone on notice that we require them not to invest abroad now. Although we can argue about the technicality of the


Clause and that it postpones certain things to bridge over individual business difficulties, the principle is unarguable and unavoidable.
I come to the point about the oil companies. Unquestionably those companies have rendered this country sterling service over the years. They are certainly one of the largest earners of foreign exchange. They earn for Great Britain something which is even more precious, a great deal of influence and prestige abroad. I well understand why shareholders and investors in those companies squeal today that the value of their shares has been knocked as a consequence of the change in this taxation method. But the shareholders in those companies have not done badly over the past 20 years.

Mr. Harold Lever: What has that to do with it?

Mr. Maxwell: Major companies have benefited enormously from taxes paid by this community for defence purposes. Those companies would not have grown to their present size and prestige if the Government ever since the war had not helped and protected them. It is about time that the managers and owners of those companies made a contribution to help this country out of its present problems. On those grounds alone one would have thought that hon. and right hon. Members opposite—if they accept, as they must, that we as a country are in a chronic economic crisis—would agree that this matter has to be tackled.
The former Administration, represented by the party opposite, for the past 10 or more years have let this position drift continually. They have masked from the country the dangerous position we have been getting into by borrowing short and lending long. They have refused to face the consequences. The present Government have said that they are prepared to tell the country the truth. This Government have told foreign bankers and foreign Governments that by telling our country the truth, by facing realities, bringing in a new wind of change, changing our taxation system, accepting sacrifices, taking unpopular action and doing all that is necessary to restore the health and wellbeing of the country, we intend to retake our place as one of the premier

exporters in the world, as an exporter of capital as and when we have earned it from abroad. We refuse to go about borowing short and lending long because that cannot be permitted to continue any longer.
This Finance Bill has been dragging on for a long time. It is highly technical but it is nevertheless of the greatest consequence and importance to our country. It brings about radical and important changes whose purpose is to encourage modernisation and innovation. Any businessman or any business which will contribute to enhancing our exports and think first whether it is the advantage of the United Kingdom which lies in its enterprise is bound to be not only rewarded but praised by this Government.

Sir Harmar Nicholls: And honoured.

Mr. Maxwell: Yes indeed, and honoured. Since the party opposite prides itself as being the party of most business experience and by its Government experience has got us into this position, are hon. Members opposite out to prove that they are as incompetent in business as they are in politics?

Mr. Robert Carr: The hon. Member for Buckingham (Mr. Maxwell) has had the experience of building up a highly successful private enterprise business of his own. He has a desire, which I honour and understand, to build a still bigger industrial empire under his leadership in future. With the experience he has had I should have thought that he would have spoken somewhat differently. He has talked the most colossal nonsense which anyone with any experience in these matters must know is colossal nonsense.
The hon. Member spoke, for example, about the foreigners who lend us money and the need to satisfy them and to get them off our backs. Those were the sorts of phrases which he used, but does the hon. Member believe for a moment that the confidence of these foreign investors and lenders in us will be increased by the spectacle of Britain reducing overseas investment on a permanent basis? It is absolutely the reverse effect which this legislation will have on the confidence of those foreign lenders in our ability to pay our way. They will lose confidence in us


because of the spectacle of our making a permanent change.
As the hon. Member for Manchester, Cheetham (Mr. Harold Lever) said, we must first get our surplus, and we on this side of the Committee would understand temporary measures to hold back investment this year. But we are talking now of legislation which will only begin to have effect in a year's time and the effect of which will be deliberately tapered off for seven years. It will become fully effective only eight years from now. That cannot possibly increase the confidence of short-term lenders.
While these short-term lenders may wish to see us take measures which are effective in the short term, they would riot wish to see Britain taking measures to reduce overseas investment in the long term, still less to reduce, as the Government's proposals do, the value of our existing investments. As the Prime Minister and the Chancellor have rightly said, the vast existing overseas investment of this country is one of the chief backings of sterling and one of the chief reasons why foreign lenders should have confidence in us.
Hon. and right hon. Members opposite keep referring to other countries. They say that they do not seem to invest as much as we do overseas, yet they seem to do well in foreign markets. But the very set-up and history of those countries are totally different. They are not heads of any Commonwealth. The hon. Member for Westhoughton (Mr. J. T. Price), whom I am sorry to note has left us temporarily, took what I can only describe as an extraordinary Little Englander outlook. This may or may not be a justifiable outlook to take, but it is certainly not the outlook which the party opposite pretends to take. It is certainly not the outlook on which hon. and right hon. Members opposite went to the country last October. Before the election the Prime Minister spent at least a year thumping up the Commonwealth and saying what a wonderful Commonwealth party his party was. But if we are to head the Commonwealth there are responsibilities which we must accept. One of these is that we should continue to be a major source of new industrial investment for members of the Commonwealth.
The major difference between this country and the other countries which have been mentioned is two-fold. First, our population and standard of living in relation to our raw materials and resources are totally different from those of many of the other countries quoted. This in itself is in many cases a powerful reason for large overseas investment, particularly in relation to raw materials.
The other major economic fact which this country must face is the percentage of our national product which we must export if we are to balance our payments. We must bring into play every facet of overseas influence and investment if we are to screw up our exports to the very high level that we must secure if we are to balance our payments. There is no other country maintaining a comparable standard of living which has to export as we do at least 30 per cent. of the national product to pay its way. This puts this country in an entirely different position from that of most of the other countries which are sometimes quoted in comparison with us.
6.15 p.m.
These are reasons why Britain must encourage overseas investment as a longterm policy. Whatever the short-term reasons for holding back, we must have a policy which encourages overseas investment in the long term, and this is why we on this side of the Committee have moved the Amendment. Based on every experience we have had and on the advice, knowledge and experience of all those best equipped to deal with these matters outside the House of Commons, we believe that as a long-term policy the one which we are invited by the Government to accept would be damaging to our national interest.
I wanted to speak today, however, not principally about these wider matters, to which I have been provoked largely by the last two speeches from the benches opposite, but particularly from the point of view of the developing countries. I want to draw attention to the damaging effects on the developing countries, particularly within the Commonwealth, of the Government proposals to change the whole scale and basis of double taxation relief as we have known it. There is no doubt that the effect will be, and indeed is meant to be, damaging. It is not, of


course, meant to be damaging to developing countries just for the sake of damaging them. I am not in any way suggesting that the Government desire to damage as such the developing countries, but I say that the inevitable results of these proposals if unamended will be to damage the interests of those countries.
It has been a major priority of British overseas policy for many years, and particularly over the last 10 years, to give aid to developing countries, to assist them to make their economies self-sustaining. Therefore, on this side of the Committee we must condemn the proposals as they stand in this Clause, and press with all our strength for their amendment. I, of course, support the main Amendment moved by my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle). This would meet the overall national need and the need of the developing countries, but if the Government insist on refusing to accept that Amendment, I make a strong appeal for special provisions for the developing countries. This is why my hon. Friends and I have tabled Amendment No. 554, which is being discussed with this Amendment.
Amendment No. 554 is on exactly similar lines to the Amendment moved by my right hon. Friend, but it limits the concession to the developing countries. I earnestly appeal to the Chancellor to grant us this concession even if he feels that he cannot grant the wider one, which I believe strongly he should do. I remind the right hon. Gentleman once again that the United States, in the measures which it has taken to restrict temporarily its outflow of investment capital, has made an exception of outflow to developing countries. Since the American example has been quoted to us as justification in other respects, I hope that at least it will be followed fully in respect of developing countries.
It is important that we should be convinced of the importance of private investment as an instrument of aid to the developing countries. Some of the statements and attitudes of at least some hon. Members opposite make me doubt whether they fully accept this—and that is not just some Tory dogma. It is a view and policy strongly held and propagated by, for instance, the Develop-

ment Assistance Committee of the O.E.C.D., the main international organisation in aid to the developing countries. This is what the Chairman of the Development Assistance Cornmittee said in his Report for 1964:
The Members of the D.A.C. have long been on record as recognising the significant role that might be played by private capital in economic development. Private investment not only constitutes a substantial addition to the fund of financial resources available to the less developed countries but, particularly in the form of direct investment, brings with it the administrative, technical and managerial skills necessary to launch or expand economic enterprises, which in turn provide training and experience for local personnel.
In other words, private investment which goes to a developing country not only leads to new or increased local output, but it brings with it built-in technical assistance and training for the nationals of that country at every level of managerial and technical skill, and it also helps to encourage what one might describe as the habit and skill of entrepreneurship which has been generally recognised as a vital factor in bringing any economy to the point of self-sustaining growth.
It is not only the Development Assistance Committee of the O.E.C.D. which ranks private investment high. So does the Overseas Development Institute here in this country, a body which is making a specialist contribution to our knowledge in this field. Perhaps even more important, because it shows the views of the developing countries themselves, the importance of private investment was specifically recognised by the famous United Nations conference, the U.N.C.T.A.D., which met in Geneva last summer. It is worth recalling that the resolution of that conference dealing with aid to the developing countries called on the donor countries to establish and accept as their target 1 per cent. of their national income for aid, including private investment. In other words, the United Nations members at that conference, the great majority of which were developing countries, clearly recognised the important role which private investment has to play in their development.
I do not for a moment suggest that private investment on its own can do the job of providing development aid to the countries we have in mind, but what


I do suggest is that Government aid on its own cannot do it either. They are absolutely complementary. One without the other does not make sense and will not achieve our objective. To give more and more Government aid without the complementary injection of private investment will not result in the best fruits and most effective use of the Government expenditure.
Until a year or two ago, private investment from Britain in the developing countries was contributing very largely to our effort. In fact, it was contributing an amount to the developing countries equal to or, more often than not, greater than the amount of Government aid itself. Unfortunately, that picture has now changed. As some hon. Members opposite, notably the hon. Member for Birkenhead (Mr. Dell), have reminded us on several occasions, the amount of private investment in the developing countries has been falling seriously in recent years.

The Chief Secretary to the Treasury (Mr. John Diamond): The Chief Secretary to the Treasury (Mr. John Diamond) indicated assent.

Mr. Carr: I am glad to see the Chief Secretary nod his head, but, surely, he will recognise that the only logical conclusion to draw from that fact is that this is a time when we ought to be encouraging private investment in the developing countries, not taking measures specifically meant to cut it down. This is the chief condemnation of the Government's proposals in relation to their effect on the developing countries. At a time when they ought to be encouraging something which is declining, they are deliberately taking action to push it still further down.
Again, this is directly contrary to the views and recommendations of the Development Assistance Committee in Paris. The other week, at Question Time, when I suggested that the proposals which she was supporting cut across the policies of the Development Assistance Committee of the O.E.C.D., to which I thought the British Government subscribed, the right hon. Lady the Minister for Overseas Development tried to deny it. But this is what is said on page 96 of the 1964 Report of the D.A.C., under the heading, "Encouraging the efforts of the private sector"—
… the D.A.C. Members should give prompt attention to O.E.C.D. proposals relating to the

use of tax incentives and a possible multilateral guarantee scheme.
Here is a direct request from the O.E.C.D. that we, along with other D.A.C. members, should give prompt attention to its proposals relating to the use of tax incentives and the possible multilateral guarantee scheme, but, instead of that, we are faced with an avowed tax disincentive, not a tax incentive. I mention the D.A.C. only to make clear that the view which I am propagating is not just a party view held in the House of Commons but is a view shared on an international scale by the most authoritative international body in this field.
I have some questions to put to the Chancellor about the Government's intentions, questions which raise important issues in judging the extent of the damage of their proposals and, therefore, the extent of the need to adopt the Amendment. First, how long is this disincentive expected to last? The hon. Member for Cheetham said that it would not be permanent because this Committee could not make it permanent and that, in another year, we could, of course, alter it. That is true, but it is the intention behind it which both investors in this country and the receiving countries will look at. The intention of the Government, surely, was that it would be a permanent feature of our legislation.

Mr. Callaghan: Mr. Callaghan indicated assent.

Mr. Carr: I see the Chancellor nod his head. I wonder whether he saw a report in the Indian newspaper, the Statesman, of 1st May. This was a report of a speech or answers to questions—I am not sure which—by his right hon. Friend the President of the Board of Trade on his recent visit to India. According to the Statesman of 1st May, the President of the Board of Trade said that he hoped
that the withdrawal of tax concessions on overseas investment would only be temporary.
Perhaps the right hon. Gentleman was misreported. If so, we should like to know. If he was not misreported, we must be told what the Government's policy is before we come to a conclusion on this Amendment. Is their policy expressed when the Chancellor nods his head and says that it is the intention to make this permanent, or is their policy


expressed when the President of the Board of Trade says in India that he hopes that the withdrawal of the tax concessions will be only temporary? On the face of it, there is a complete conflict between two members of the Cabinet on this subject. As I say, I have quoted only from a newspaper report. If the President of the Board of Trade was misreported, we should be told, and then the apparent contradiction will be cleared up and we shall know that the intention is to make it permanent.
6.30 p.m.
The second question concerns whether it is the right hon. Gentleman's intention that the reduction in private investment in developing countries which he deliberately wants to bring about by this means will be compensated for by increasing Government aid. We should know what the Government's policy is on that, because, here again, there seems to be some conflict. On 1st June, in response to a supplementary question that I put to her, the Minister of Overseas Development, speaking about the volume of expected Government aid, said:
I am not expecting any decrease. On the contrary, I am hoping for an increase."—[OFFICIAL REPORT, 1st June. 1965; Vol. 713, c. 1482.]
I know that the Chancellor could ride out this and say that we all hope for things but when a Minister makes a statement in the House would-be recipients are inclined to think that the hope is an intention. Is it the intention of the Government to increase aid? They promised to do so before last October not only here but in the developing countries themselves. However, an apparently conflicting statement was made by the Chancellor himself speaking in the opening debate on the Corporation Tax on 2nd June. He said, referring to the reduction of outflow,
This must apply on Government account, as well as to private account, and I should like to make it clear now that I regard it as an essential obligation on me to see that Government expenditure overseas is reduced, as well as seeing that private expenditure overseas is reduced…"—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1744.]
It is true that the words he used were "Government expenditure overseas" and I realise that aid expenditure is not the only form of Government expenditure

overseas. But the right hon. Gentleman was specifically speaking in the context of overseas investment and immediately following an intervention that he kindly allowed me to make on the subject of developing countries. Unless he chooses to clarify that statement, anyone reading it will feel that he was saying that he had to make a reduction in the outflow of Government expenditure—or at least, certainly not an increase—in the form of aid to developing countries, just as he had to hold back the outflow of private investment in developing countries. We should have some statement about that.
Finally, if there is to be an increase in Government aid in order to offset the reduction in private investment in the developing countries, how will that improve our balance of payments? Perhaps there is some subtle reason not apparent to me or other people; but surely a Government loan is a greater burden on our balance of payments than a private investment in a productive undertaking overseas. If the object of the exercise in cutting down private investment in developing countries is to relieve our balance of payments, that object will not only be neutralised but worse from the balance of payments point of view if the private investment held back is replaced by Government loan. If that is not so, I hope that the right hon. Gentleman will explain.

Mr. Callaghan: Most of the companies operating in these territories are overseas trading corporations that bring no return to the United Kingdom.

Mr. Carr: This brings us back to the nub of the difference between the two sides. It concerns the Government's belief that these corporations bring nothing back. But one gets some dividends. One gets some royalties back. One gets a large number of orders for machinery back.

Mr. Diamond: That is not proved.

Mr. Carr: The Chief Secretary says that it is not so, but it has been proved in the case of large numbers of individual companies. If it is not true on average then I support the hon. Member for Birkenhead in some of his pleas in recent weeks that we should have an inquiry that would establish the facts. But until we have established them we should not alter the structure of our tax system on the


assumption that the Chief Secretary is correct. The Chief Secretary or I may be correct. Let us assume for a moment that there is doubt about it. We should certainly not alter the whole basis of the tax structure unless or until his point of view is borne out by a factual inquiry.
I should disclose an interest here. I am asociated with a number of companies operating overseas, and in my personal experience there is undoubtedly a net beneficial flow back to this country. Companies do not invest overseas for fun any more than they export for fun. It is very hard work. Sometimes, until they have learnt the lessons of experience, it is not an easy or successful task. But we do it because, unless we do so, we shall lose markets which we already have and we shall not only lose the market for that part of the range of our products to be manufactured locally but also for the wider range of related products which will still be manufactured outside the country concerned.
Obviously, the company which has its local facilities for production supplies not only its products made in that country but the associated products still made here at home. It brings back the bulk of the orders for the equipment for the factories concerned. It may not do so in every case but, from a fairly wide experience, and drawing on the knowledge of people with much wider experience, I believe that on average there is a total benefit from overseas investment—the dividends, the know-how payments, the orders for the plant and equipment and the opportunities for further export to that market which come from being established in it. I find it difficult to believe that all this does not contain substantial benefit for our balance of payments.
Although it may not be necessary for other countries which have to export say only 10 per cent. of their national output to bring every lever to bear in order to get orders from overseas, I am convinced that it is necessary for Britain to do so since we have to export at least 30 per cent. of our national product if we are to live at the standard of life that we have and which we hope to have in future. For the sake of the developing countries, for the sake of the prosperity of our own people and for the sake of our role in the Commonwealth and the

world I beg the Chancellor to accede to the Amendment.

Mr. Dell: I am glad to follow the right hon. Member for Mitcham (Mr. R. Carr) because, like him, I am very interested in the prospects and problems of development in the less developed parts of the world and concerned with any disincentive effect that taxation proposals may have on investment in them. But, as he says, in referring to remarks that I have made during debates on this Bill, there has been a reduction in private investment in the less developed parts of the world. That reduction appears to affect not merely this country but all industrial countries and it seems to me that this is a far larger and wider question than one that can be affected by the details of Corporation Tax in this country.
If we are to deal with the problem at all—and I accept the right hon. Gentleman's sincerity in wishing to deal with it—it must be dealt with in quite different ways from the ways he seems to be concerned with. The main problem here is simply that investment in developed countries is more profitable than investment in less developed countries and it is for that reason that investment in less developed countries has been falling year by year. If we want to increase the amount of investment in less developed countries, we have to adopt quite other methods. We have to adopt very much more radical methods than developed countries have yet been prepared to adopt. If right hon. Gentlemen opposite and my right hon. Friends are willing to support the sort of methods which will be necessary to increase private investment in less developed countries, I shall be delighted.
The sorts of methods which are required are those which will increase the profitability of private investment in less developed countries, such as commodity price agreements which will tend to raise the prices which the less developed countries can obtain for their commodities, extensions in the system of preference offered to less developed countries on their manufactured goods—and may I say in passing that it is a pity that the new Part IV of G.A.T.T. makes no reference to this—possibly permission within the international trading system for export subsidies, certainly the gradual elimination of quotas on manufactured imports


into the developed countries and certainly the elimination of the systems of differential tariffs existing in too many developed countries which discourage the processing of raw materials in less developed countries.
All these are measures which would end with the result that private investment in less developed countries would not be less profitable than private investment in developed countries. If measures of that sort are taken by the Government and by the Governments of other developed countries, they will have an effect on the rates of private investment in the less developed countries. If in addition we can have a guarantee of investment in less developed countries, and I think that such a guarantee is now under consideration, we may make a radical change in the present undesirable and worrying situation.

Mr. Heath: Will not the hon. Gentleman agree that, with the sole exception of export subsidies, those are the proposals which we put forward at U.N.C.T.A.D. at Geneva?

Mr. Dell: I agree that those were the sorts of proposals which were put forward. Unfortunately, this was a preliminary conference and no decisions were made, but decisions of that sort have now to be taken and I hope that the Governments of the developed world will now agree on measures such as these.
In other words, the answer to the problem is to make investment in less developed countries more profitable and more secure than at the moment. The details of the system of company taxation in a country such as this or other countries in the developed world are not the answer to the problem.
I return to the point which I have made several times in these debates and which I should not have made again had it not still come from hon. Gentlemen opposite. Again and again I have made the plea for an inquiry into the effect on our balance of payments of overseas investments, and I have also stated that in my view my right hon. Friend is correct in his decisions, because the balance of the argument as it stands is that the effect on our balance of payments has been unfavourable.
Right hon. Gentlemen opposite have referred to the effect on our exports. There is no doubt that there are certain ways in which overseas investments benefit our exports. It may be that a great deal of the capital equipment which is exported to the countries in which we invest comes from this country. It may be that there is a flow of raw materials as a result.
Nevertheless, we cannot take the whole of the credit for those exports as returned to us on these overseas investments, because one of the things holding back our exports at the moment is our lack of capacity. In other words, it would appear that much of the exports now credited against the investments which we make overseas would have occurred anyway. Because in our total demand, home and overseas, we are running up against our total industrial capacity, my right hon. Friend has had to introduce taxation which will cut home consumption so as to release capacity for export. In other words, in the short run at any rate, we face a situation when much of the exports being credited against our overseas investment would probably have taken place anyway.
6.45 p.m.
Let us take the particular example of chemicals. I take the example because I happen to have some experience of this industry and also because we have recently had a specific report on it and on its balance between imports and exports, and also a specific statement from the chairman of the largest chemical manufacturing company in this country, Sir Paul Chambers, the Chairman of I.C.I. He has said that the main fact which is now limiting an increase in I.C.I. exports is lack of capacity. I.C.I. is justly presented as one of the best examples of the effect of overseas investment on our balance of payments, and yet at this moment I.C.I. is able to export less than would otherwise be the case, because of lack of capacity.
There is also the fact, mentioned in the Report of the Economic Development Committee for the Chemical Industry, that:
Since 1962, imports have increased by 46 per cent. During the same period the home consumption of chemicals has increased by 21 per cent. Since 1962, direct exports of chemicals have risen by 21 per cent.


What do these figures mean other than that we have had to import chemicals partly because we have lacked capacity to supply them? They also mean that the rate of increase in our exports of chemicals has been lower than it could have been, because of lack of capacity.
We therefore have to accept that much of the argument that overseas investment is justified by the exports which follow it is, at any rate in the short run, untenable. These exports would have been made anyhow, because our exports are currently being held back by lack of capacity.
There are other companies which have specifically stated that their overseas investments have no effect on exports. Courtaulds have specifically said so and it must be true of many companies, in addition to those which claim that there is a beneficial effect.

Mr. William Shepherd: Have not the Americans specifically stated that 23 per cent. of their total exports of manufactured goods go to subsidiaries in other countries?

Mr. Dell: The Americans have certainly given a very similar figure. However, if the hon. Gentleman will examine, with the care which these facts deserve, the comparison between the American export performance in relation to American overseas investment and our export performance in relation to our overseas investment he will find that the American performance is much more favourable than ours. The Americans have adopted the deliberate policy of making those overseas investments which increase their exports.
I can give many examples of this, for I have come to the Committee armed with examples. It will be found that the Americans have deliberately made the bulk of their investments in countries which as a result have imported a great deal more from the U.S.A. Going through a list of American investments overseas one finds again and again that they are in highly developed countries, and, as a result, there has been a very large expansion in American exports to those countries.
As the hon. Member for Cheadle (Mr. Shepherd) is interested, it might be worth giving a few examples. Between 1959

and 1963, the Americans invested 769 million dollars in the German Federal Republic and, as a result, or as a consequence or following this—I do not want to state that this is necessarily cause and effect—American exports to the German Federal Republic have risen considerably.
The Americans have invested the sum of 467 million dollars in France during the period 1959 to 1963, and American exports to France during that period have practically doubled. This is a very remarkable record and it probably shows that if overseas investment is planned properly it will have a most marked effect on exports. If one looks at a British overseas investment unfortunately one does not find the same effect at all.

Mr. Airey Neave: Does not the hon. Gentleman agree that one of the purposes of overseas investment is to increase exports? Therefore, the policy of the Government in cutting it down is likely to damage our export trade.

Mr. Dell: I entirely agree with the hon. Gentleman: one of the desirable effects of overseas investment should be to increase our exports. I think that any company in this country planning overseas investment should have in its mind the desirability of increasing our exports as a result. A handful of companies in this country, when considering overseas investment, do have this result in mind. Unfortunately, if our overseas investments are examined, it will be found that our exports do not follow our overseas investments.
In a short intervention I made earlier I gave the example of Australia. Australia is important, because, leaving aside investment in oil and insurance, Australia accounted for 20 per cent. of our overseas investment during the period 1959 to 1963. During that period we invested £237 million in Australia. Yet, if the figures are looked at, our exports to Australia throughout that period remained pretty well stationary. In 1964 the figures of our exports to Australia were still less than they were in 1960.

Mr. Tilney: Do these figures include our invisible exports and dividends to Australia which are very considerable indeed?

Mr. Dell: These figures do not include our invisible exports to Australia. They are specifically on the point I am trying to separate—the effect on our exports of overseas investment. Hon. and right hon. Gentlemen opposite have repeatedly referred to this point. They have repeatedly said that there is this very beneficial effect on our exports. I personally am at one with them in this: overseas investments should produce a beneficial effect on our exports. The fact that they do not is most unfortunate, and I am afraid that in too many cases it may reflect on the quality of management which has made those particular overseas investments.

Mr. R. Gresham Cooke: Taking the instance of Australia, if we had not made investments in Australia our exports would have fallen even more sharply. If one is prohibited from exporting a motor car or a machine tool to Australia, which is the present position, one opens a factory there which can import some of the parts made in this country. Our exports would have gone down even more but for that.

Mr. Dell: Hon. Gentlemen opposite have such a contemptuous attitude to the quality of British management that I am horrified. We have hon. Gentlemen opposite saying that had we not made these investments our exports would have fallen, even though other countries, which have not made investments of anything like the same size, have increased their exports in the territories in which, according to hon. Gentlemen opposite, we would have lost exports. Hon. Gentlemen must really decide whether this contemptuous attitude to the quality of British management is justified.

Sir Harmar Nicholls: The hon. Gentleman has used the word "contemptuous" in relation to observations made from this side of the Committee. He has said that investments abroad should produce exports and has quoted other countries whose investments abroad have resulted in exports. The only inference to be drawn from that is his contempt for British management and British industry—that they are not as patriotic or as keen or as able as our competitors in other countries. Does he wish that slur to stand, because it is the only message in the words he used?

Mr. Dell: I think it was an hon. Member opposite who was guilty of the slur. I have certainly said that our overseas investment policy, the policy of many of our companies, certainly deserves review. I think that one of the results of the introduction of the Corporation Tax will be that there will be this very desirable review. I was merely saying that for an hon. Gentleman to say that our exports to Australia would have fallen if we had not invested £250 million-odd in Australia over a period of five years is surely a contempt of the quality of British management, which fortunately British management does not deserve.

Mr. Gresham Cooke: I cannot let the hon. Gentleman get away with that. They would have fallen, for the reason that Australia was putting up import controls which prohibited our exports. One cannot export a motor car, for example, to Australia.

Mr. Dell: I am finding it increasingly difficult to make a speech in this Committee because I find that every two minutes hon. Gentlemen opposite jump up to intervene. It must be that I touch them on the quick. If the hon. Gentleman was aware, for example, of the figures of American investment in Australia and the effect that the American investment in Australia has had on their exports, he would find a very different picture which contradicts the whole of the position he is now taking up. The Americans have invested a very much smaller sum than we in Australia but their exports to Australia have been going up by leaps and bounds. These are the facts, and I am sorry that hon. and right hon. Gentlemen come to this Committee to speak on this subject without having investigated the facts. It is not my responsibility, but I am prepared to provide them with the facts and give them copies of the studies I have made on the subject. I think that out of courtesy to the Committee hon. Gentlemen should come with a little information before they make the extravagant claims that they do.
The trouble, I think, is that we have concentrated our overseas investments in countries which have taken a highly protectionist attitude and have said "As a result of your overseas investment we will ban the imports of the same goods", and naturally as we have been making


abroad the type of goods we make in this country the direct effects of our investment in those countries has been to cut our exports rather than to increase them. This is an unfortunate and undesirable result. It is not the sort of result we should have from overseas investment, but on the basis of all the figures I have been able to accumulate this has been the result. There can he quite a different effect. I hope that one effect of the sort of investigations now being made in companies and in the Treasury as to the effect on our balance of payments on overseas investment will be a reappraisal, both by Government and companies, of the sort of considerations that ought to govern our overseas investments. I think that will be very much to the benefit of our economy.
I am sure that in so far as the effect of the Chancellor's proposals are to increase investment in this country they also will be very beneficial, because if we can increase investment in this country we will also be able to increase our exports and to increase the standard of living in this country. The message that the Chancellor's proposals give to this country is of the importance of investing in Britain, and that is an importance which no hon. Gentleman will deny.

7.0 p.m.

Mr. Braine: I wish strongly to support all the Amendments moved by my right hon. Friends in their very cogent and persuasive speeches. Whatever arguments can be adduced for Corporation Tax as such, it is clear now from the views expressed on this side of the committee, that its side effects on overseas investment, whether intended or largely unforeseen, are damaging both to the longterm national interest and to the interests of developing countries overseas. That these side effects are damaging and that they may have been to some considerable extent unforeseen, is, I think, recognised by the Chancellor in coming forward as he has done with the extension of transitional reliefs. It is not without significance that the Committee is discussing this subject today at a time when the Commonwealth Prime Ministers are gathering in London to discuss economic and trade problems which stem in substantial part from a shortage of private investment in their own countries.

I entirely agree that in the short term, if our country is faced with a balance of payments problem, there may be a need to exercise great caution. There may be need to subject new investment to a close scrutiny and, perhaps, as my right hon. Friend the Member for Mitcham (Mr. R. Carr) said, to curtail it sharply in the coming 12 months. On this point the hon. Member for Manchester, Cheetham (Mr. Harold Lever) was absolutely right, as he has been so often throughout these debates. But this is not in issue; this is not really what we are discussing. Our contention on this side is that we will not cure the balance of payments problem by penalising existing overseas investment as the Chancellor proposes.
I wonder whether the Committee recalls what the N.E.D.C. said in its account of gains and losses as set out in its report on "Conditions for Faster Growth". Its conclusion was that severe restrictions on private investment abroad could hardly be maintained indefinitely and, in any event, could worsen the current account of the balance of payments in the long run. A policy which forces United Kingdom companies operating overseas to remit a larger proportion of their profits home may certainly serve the short-term interests of the Treasury, but at a far greater long-term loss. The reason why I support the Amendments with their different methods is that they would reverse that policy.
In some cases, that policy is positively damaging to the interests of countries with whom we have long had trading links, and, in particular, of countries which are the recipients of United Kingdom Government aid. I am always interested in the speeches of the hon. Member for Birkenhead (Mr. Dell), because there is a great deal of sense, clarity and vision in what he says. He would, however, allow that, in judging a matter of this kind, we are not dealing with the export trade of the United States or with the fiscal and trade problems facing the Federal German Republic or France. Here, as I shall show, we are dealing with a unique trading pattern and unique trading problems.
The Chancellor and the Financial Secretary to the Treasury have tried to argue that the advantages of overseas investment are overrated and that we could get a higher return for the same


money invested at home. I do not doubt that this would be true in a good many instances. According to the Chief Secretary on 2nd June, the average return to this country from a foreign investment is 4 per cent. The right hon. Gentleman said:
Eight per cent. is made. Half of it is reinvested abroad and 4 per cent. comes back to this country."—[OFFICIAL REPORT, 2nd June, 1965; Vol. 713, c. 1847.]
The comparison, the right hon. Gentleman told the Committee, is with a 15 per cent. return on our domestic investment, half of which goes in tax and provides considerable social benefits. The right hon. Gentleman has patiently worked hard and patiently throughout our proceedings on the Bill, and we all respect him for the good temper he has shown throughout our debates. Nevertheless, that is an extraordinarily facile argument, and I will venture to say why.
First, it takes no account of the great diversity and complexity of our overseas investment. Secondly, it takes no account of the close, intimate connection between investment and exports. Thirdly, the figures adduced by the Chief Secretary are doubtful in the extreme.
Take, first, the scale and nature of our direct overseas investment. Capital is not exported for fun. It goes overseas, it grows there, flourishes and changes. In some instances it is highly rewarding, in a good many cases it is not very rewarding, and in some it is positively unrewarding. I see present a number of my old friends from the former Colonial Territories in Africa and Asia. They know only too well how unrewarding such investment often is but how necessary it is for the economies of developing countries. The fact is that our direct investment overseas has gone there because of a trading pattern which is peculiar to Britain. Few great manufacturing nations have such a dearth of domestic raw materials. We were obliged to go overseas to develop sources of raw materials. That is the first consideration.
The second consideration is that exports are vital for our economy. Not a speech is made without this being underlined. If we express exports as a proportion of respective gross national products, ours are three times bigger than those of the United States of America.

They have to be, because although the United States is not wholly self-sufficient nowadays in raw materials—she is increasingly taking an interest in the exploitation of resources all over the world—she is rich in minerals and raw materials of every conceivable kind. She is so rich in food that her great problem is what to do with the vast surpluses that she possesses. We are poor in raw materials. We provide about 50 per cent. of our own food and our climate is such that a great many of our foodstuffs have to be imported. We export or perish, and there is no other country in the world of which this can be said.
The third consideration—and this is the answer to the hon. Member for Birkenhead—is that much of our overseas investment is defensive. As tariffs rose against us, as they continue to rise against us in our traditional markets, which are now fast industrialising, incidentally with our encouragement and help—that is a phase through which these countries must go—we were and are obliged to build factories behind the tariff wall in order to keep a share of valued markets. Is this wrong? Apparently, according to hon. Members opposite, it is.

Mr. Dell: In my view, one of the troubles with our overseas investment has been precisely that it is defensive. One should not invest overseas defensively. One should invest overeas, if at all, aggressively.

Mr. Braine: I accept the correction. The hon. Member, however, is on to the wrong point. I used the word "defensive" in the sense that to provide 54 million people in these islands with a high standard of living—a far higher standard of living, for example, than the people of Japan, who were quoted earlier, or a far higher standard of living than almost any other industrial country except the United States of America—we have been forced to invest overseas in order to protect our sources of supply of raw materials and to obtain the foodstuffs necessary to sustain our people. That is not the position of the United States nor that of the Soviet Union.
Does anyone in the Committee believe that if a great part of the capital employed for those purposes had stayed at home, we would have remained in business and would enjoy the standard of


living that our people enjoy today? Bearing these considerations in mind, to use the new Corporation Tax to try to channel surplus money into home rather than overseas investment is to use a crowbar to sort a collection of Dresden china. It is crude, inefficient and bound to cause considerable damage.
A great many global figures have been adduced in this discussion. Trade, however, is not a matter of global figures. It is a matter of movements of commodities, large and small, and of a vast range of goods and services. Consider the diversity of our overseas investment. First of all there are the mineral extraction companies. I am not going to say anything about oil, because this has been dealt with so effectively by my hon. Friend the Member for Yeovil (Mr. Peyton) earlier this afternoon. These companies operate overseas because they have to. Oil companies in America operate overseas, too, of course, but there are already vast resources of oil inside the United States of America, while if we want to bring oil to this country we have to go out to get it.
Extraction companies go overseas because that is where the minerals and the oil are to be found. Here the benefit has been to ensure the supply of fuels and raw materials needed for British industry, both for home consumption and for export, and—this is a point which the hon. Gentleman the Member for Birkenhead has overlooked—at prices which have probably fluctuated less than they would have done if we had not had a stake in their production. I have forgotten for the moment the name of the organisation, but there was a report on world trade published some years ago which showed that in general, in the years before the war, Britain and her dependencies enjoyed great advantages as a result of Imperial Preference and price stability than countries outside the sterling area. These are advantages not to be sneered at.
The criterion here should be, surely, will the proposals in this Bill and in this Clause encourage or discourage British-owned companies in relation to their international competitors? On this side of the Committee there is no doubt whatsoever as to the answer, and there are plenty of hon. Gentlemen on the other side of the Committee, too, including the

hon. Gentleman the Member for Cheetham who have no doubt.
Then we come to the second group of companies, the plantation companies operating in the poorer, under-developed countries which in general have difficulty in attracting new risk capital. Of course American enterprise does not venture into those countries, because there is no return, or virtually no return. The British companies are there, however, because they went there fifty or sixty years ago or more. Here the great difficulty is to attract new risk capital.
These are some of the facts of life, which hon. Gentlemen on the other side of the Committee seem to know so little about; but they are facts of life. Many British investors in those countries, no doubt from a purely selfish point of view, would like to repatriate their capital and bring it back here, but the effect on the developing countries in question would be quite disastrous. Here the direct benefit to the United Kingdom economy may be little, but it is probable that it helps to keep the terms of trade reason ably favourable. It encourages the export of machinery and capital.
I, too, have here a file of letters from companies in those territories, showing how they have been assisting the export of British machinery, components and expertise. Indeed, if we had not supplied those things they might have come from other quarters, or they might not have come at all. These are, in the main, grant-aided countries, and this is what attracts me so much to the Amendment of my right hon. Friend the Member for Mitcham. These are countries which are the recipients of grant in aid or loans from the British Exchequer. The British people as a whole have a stake in the political stability and the economic future of those countries. The British taxpayer is pouring out money to assist those countries to overcome their problems. Precisely because these countries are struggling against poverty they need the contribution which the wretched shareholders in these companies make, not only to the economy of the United Kingdom but also to that of the host countries.
As the Committee knows, I have been concerned with Commonwealth trade matters for a good many years and have had scores of letters from companies


operating in these territories. Here is a letter from one tea company operating in Malawi, surely one of the poorest countries of the African continent. That company has no doubt whatsoever about the Chancellor's proposals. It is pleased with the reliefs which the Chancellor is proposing, for they alleviate the position slightly. But the company goes on to tell me:
What is absolutely clear is that when the effects of the Chancellor's proposals are felt there will be very little money for capital expenditure and no possibility of putting money by for further investment either in new projects or in investment in United Kingdom stocks and shares.
7.15 p.m.
This is a company which has over the last six years ploughed back nearly 50 per cent. of its net profits into improvement of its estates; it provides scholarships for the young people of the country; it has served Malawi well. The company tells me
There is no doubt that there will be a depressing effect on the part played by this company in the economy of malawi and on the way in which it plays a part, albeit a small one, in the economy of the United Kingdom, if the Chancellor's Bill is passed.
Like other hon. Members, I could go on reading from scores of letters like this.
It is odd that we have to make this point to a Government who have made so many promises to aid the poorer countries of the world. In this I believe the Labour Party is perfectly sincere. I remember how throughout the period of the last Government the Labour Party was constantly urging us to devote more and more aid to those countries, and yet here it is manifest that the steps which are being taken by this Bill will injure the economy of countries already in receipt of and and, no doubt, expecting more.
The third category of companies are those operating in countries like India and Australia, countries which are now highly industrialised, and where industrialisation has caused imports to be replaced by domestic manufactures. Here, the existence—I say this emphatically—the existence of British-owned subsidiaries is the only means of keeping a share of the market, but this also means exporting British components and capital goods and receiving back royalties and remittances.

When hon. Gentlemen on the other side talk of overseas investment they always leave the side effects of such investment out of the calculation, but they are, of course, as important to the balance of payments as they are to the economy. Here the question is surely how far it is important to keep a toe-hold in markets where good will towards British business is still very considerable. These Amendments, if the Committee carries them, will make some easement for these companies.
What defeats me is that the Chancellor and his henchmen have completely failed to recognise the close link which exists between overseas investment and exports. The hon. Gentleman the Member for Birkenhead, who has made some of the most intelligent speeches from the other side of the Committee—there have been very few speeches on that side—and one feels bound to listen closely to what he says, threw considerable doubt—this worried me because I know he speaks with some considerable knowledge—on the link between overseas investments and exports. It is true that there has been a tendency for some years for private investment overseas, particularly in the under-developed countries, to decline, but the reasons for that are clear enough, and it is the duty of Governments, as the hon. Member for Birkenhead said, to get together to promote the kind of atmosphere in which it is possible for investors once again to take an interest in countries where there is still considerable political risk.
The hon. Gentleman was able, as I think the Chief Secretary was, to throw doubt on this relationship between exports and investments because he lumped all the figures together. He took no account of the variety and indirect benefits of overseas investment. Nor did he take any account of the duty which his party always urged on us on this side of the Committee, that of keeping going in countries where the return is small, where the profit is small, precisely because these countries are poor. What has happened to the idealism of Socialists in the course of the debates on this part of the Financial Bill? It has completely disappeared.

Mr. Shepherd: Was not the hon. Gentleman even less straightforward than that? He said that he was dealing with visible exports from Australia, but when


he came to capital investment he did not split it between visible exports and invisible surpluses.

Mr. Braine: That is a valid point, and underlines what I have been saying. The only effect of the Chancellor's proposals is to make things more difficult in countries where risk capital has been shy to go. I have no doubt that, just as in earlier times trade followed the flag, so today it follows investment.
Large overseas investment brings enormous advantages to the country. I.C.I. has been quoted as an example, and I shall not go into detail, except, as the hon. Member for Birkenhead preceded me and mentioned something that Sir Paul Chambers had said in April. In his Chairman's speech he said that
although I.C.I. probably earns a lower rate of return on its investments abroad than on those at home, the value of exports generated from I.C.I. companies in this country over the last 15 years as a direct result of such investments has been more than three times that of the capital outflow.
I have no doubt that companies in the motor car and rubber industries could tell the same story.

Mr. William Baxter: I was rather interested in the hon. Gentleman's comment about trade following investment. He has not given us any facts or figures to prove his contention. It has been proven to my satisfaction that, certainly with regard to Japan and Germany, trade does not follow investment, but follows salesmanship. I think that if the hon. Gentleman were to devote a little more of his time to considering the desirability of expanding trade on the basis of good salesmanship, he would be nearer the point. Further, I think that it might be better if he were to devote a little more time to explaining the position with regard to the balance of payments situation, and how we can rectify it without taking the action which my right hon. Friend has indicated in this Clause.

Mr. Braine: The hon. Gentleman is correct in one respect. If one takes the global figures, the picture is nothing like as, encouraging as if one takes particular companies. There is a lot to be said for the view expressed by the hon. Member for Birkenhead. We ought to be taking time out to find out the facts. This is what I complain about in the Chancellor's

proposals. He is acting with a lack of knowledge of the facts.
We know at least two things. A little earlier my hon. Friend the Member for Cheadle (Mr. Shepherd) quoted a figure. He said that 23 per cent. of American manufactured exports were purchased by the subsidiaries of American companies abroad. The Federation of British Industries carried out an investigation into this matter. It questioned 40 to 50 leading British companies and last month published its report which showed that there is in fact a close association between capital and goods in the case of many firms.
I do not want to detain the Committee for very much longer. I could quote from examples which I have, and I am willing to provide the details to the Chancellor. I am willing to provide examples showing how particular companies have increased their investment overseas, and how this has been followed by substantial exports.
I grant that it is difficult to be precise. I grant that the Chancellor's concessions in regard to the transitional relief will give more time to assess the matter, but I think that the arguments which the hon. Member for Birkenhead and the Chief Secretary have adduced to show how poor is the return on overseas investments in relation to domestic investment have been shown to be faulty.
I suppose that one of the best authorities on this subject is Professor John Dunning of Reading University. He has done more work on this subject than anybody else in the Kingdom, and during the last few days he has written this:
In the period 1958–62 the private rates of return on home and overseas investment (i.e. profits less tax as a proportion of net assets) were about equal; both averaged out at slightly less than 8 per cent. On the other hand the average social rate of return on home investment (profits before tax as a proportion of net assets) was 13·8 per cent., and that on overseas investment the same as the private rate of return. The implication of this difference is that had the resources invested overseas by companies (other than those in oil and insurance) in the period 1958–62 been invested at home and similarly distributed as the existing capital stock, the community would he better off today by some £60 million per annum …
Broadly that supports the kind of argument that was being adduced by the


Chancellor, but Professor Dunning then says:
… as they stand, these figures can give a misleading impression and can be variously interpreted.
He then gives his reasons for saying that. I suspect that this is what the Chancellor did not take into account and I hope that he will be able to tell us whether I am wrong, and whether Professor Dunning is wrong. The reasons are as follows:
First, the profits data recorded by U.K. companies at home are those obtained from the consolidated accounts of U.K. public companies, which themselves include the profits earned from overseas operations. … Secondly, the royalties and fees paid by foreign subsidiaries and associates for services rendered by investing companies are not included in the overseas earnings figures."—
That is what I have been complaining about during this debate—
When these are taken into account they reduce the differential between home and overseas social and private rates of return. … Thirdly, included in the domestic profits are the earnings of foreign-owned companies in this country. Fourthly, and working in the opposite direction to the three factors mentioned above, the profitability ratios of U.K. companies overseas take no account of the tax which has to be paid to the U.K. Exchequer on remitted profits equal to the differential between the U.K. rate of tax and the local foreign tax.
Professor Dunning concludes by saying:
The purpose of this article has been to show that the case for or against curbing foreign investment is not proven.
That is the answer to the hon. Gentleman.

Mr. W. Baxter: There are many other factors to take into account when considering whether foreign investment is more profitable to the nation. One must not consider merely the amount of net return to the investor. An industry in my constituency has closed down because British capital has been utilised to start a similar industry in another part of the world. People in my constituency are unemployed. What does the hon. Gentleman say about that? The fact is that we have to take into consideration the amount of money that is paid by way of unemployment benefit to the people in my constituency who are now unemployed.

Mr. Braine: If I followed that road, I would not merely detain the Committee

for far longer than I intended, but I would stray very wide of the debate.
7.30 p.m.
All I am saying is that we should not merely test this matter against the financial return for this country. Many other benefits are obtained from overseas investment. In our own peculiar circumstances, without access to foreign sources of supply our economy would be gravely disadvantaged.
There is one final consideration. The export of private capital is not the only part of the story. What about the impact on the balance of payments of the massive growth of Government aid in recent years? In the short term, each million pound's worth of aid has the same impact on the debit side of the balance as each million pound's worth of private investment overseas. We can argue about the long-term effect. If aid is properly used it undoubtedly helps a country to improve its educational facilities, infrastructure, and the rest. On the other hand, each million pound's worth of investment overseas will bring benefits to the country concerned and also to the British economy.
When the Conservative Government were in office they were faced with incessant clamour from the party opposite to increase aid and to help the poorer countries to help themselves, How is this to be done? We do it by grants, loans and, surely, by encouraging private enterprise in every form. This is not my view; it is not a Tory doctrinaire view. Let the under-developed countries speak for themselves. My right hon. Friend the Member for Mitcham referred to last year's United Nations Conference on Trade and Development, in which a notable part was played by my right hon. Friend the Member for Bexley (Mr. Heath)—who has not been given sufficient credit for it—in giving a lead to the 120 nations gathered together there.
Of those 120 nations, 70 were in the under-developed category. That conference recognised
the contribution of direct private foreign investment to the economic diversification and the development of private capital to both importing and developing countries.
It further declared that
foreign private investment brings technical know-how and managerial skill.


and it
called upon Governments of capital exporting and developed countries to avoid measures preventing or limiting the flow of capital to under-developed countries and to encourage it by tax exemption and reductions and giving investment guarantees to private investors in the under-developed countries.
In short, the under-developed countries of the world know very well the value of existing private investment in their countries. They want more of it.
In this instance the Chancellor has given them a very dusty answer. I beg him to reconsider the matter. If he cannot accept this Amendment, let him accept the lesser Amendments Nos. 554 and 555. Let him openly discriminate in favour of the Commonwealth and the poorer countries.

Mr. Douglas Dodds-Parker: My hon. Friend the Member for Essex, South-East (Mr. Braine), who speaks with such enthusiasm and knowledge on this subject, has gone wide enough on the points raised by the hon. Member for Birkenhead (Mr. Dell), and there is only one point that I wish to raise in connection with the speech of the hon. Member for Birkenhead. He seemed to disagree that trade followed the flag in Australia, but seemed to imply that it followed the American flag into Germany and France. That is the sort of point that should be looked into in an investigation of the effect on our balance of payments of investment overseas.
We must consider the many imponderables, such as the flight of capital from Socialism or the fear of Socialism. That is the reality of the situation that this country has been facing for the last few years.

Mr. Callaghan: Since 1961?

Mr. Dodds-Parker: Yes. Let us be quite clear about it. There was a fear that one day there might be the return of a Government other than a Tory Government. [Laughter.] The Chancellor may laugh, but I have been earning my living in business since the end of the war and I have worked in the export trade. We have to face the facts.

Mr. Callaghan: The hon. Member said that was a flight of capital because of the fear of Socialism. I was asking him whether that was true in 1961 when we

had a stable Conservative Government with a large majority and the prospect of a long term of office—but an almost record flight on capital.

Mr. Dodds-Parker: In terms of an expectation of office, three or four years is not a great length of time in commerce or industry. If the Chancellor does not realise this, I suggest that he gets better informants to tell him what goes on.
I have said that this is one of the imponderables which would have to be considered in any investigation of the matters referred to by the hon. Member for Birkenhead. We cannot isolate these individual influences on investment or sales overseas. That is the point that the Department of Economic Affairs is looking into.

Mr. W. Baxter: On a point of order. This is the Committee stage of the Finance Bill. Is it in order for an hon. Member to read every word of his speech?

The Deputy-Chairman: Reading is never in order, but looking at copious notes is allowed.

Mr. Baxter: Further to that point of order. The hon. Member who has been speaking has been reading every word of his speech. Is that in order?

The Deputy-Chairman: The copious use of notes is in order.

Mr. Dodds-Parker: I was not reading. I was quoting the remarks of other hon. Members who had spoken.

Mr. Baxter: Look at him reading!

Mr. Dodds-Parker: I leave it to you, Sir Samuel, to tell me when I am not in order.
I come now to a point which is essential for us to study in connection with this matter, namely, the relief from general taxation. The Amendment intends that the excess of profits over Corporation Tax should be allowed as a tax credit. That is the issue that we have been debating. In other words, this is some form of double taxation. I am trying to speak on this matter from the rather narrow point of view of one who has been concerned with the practical application of commerce and industry to work overseas.
The Chancellor will have noted that so technical is this Finance Bill that the Clause is almost unintelligible if read by itself, without the use of any cross-reference. I have no direct financial interest to declare except a small shareholding in a company with overseas trading interests. I came to this place soon after the war, however, and I speak from experience gained with the company that I worked for then, which was trading overseas. For the first 40 years it had not paid a dividend, which a number of my Socialist friends in those days thought was not a bad start for a company.
From the information I gathered then I was able to see the practical problems of development in these overseas countries during the physical shortages of those days, rather than the financial difficulties that we have today. War-time taxation was kept on. From those years we moved forward slowly to 1950–51, to the post-Korea period and a Ministry of Raw Materials. Not until 1951 did we return to office and started to "set the people free", largely by a reduction in taxation. By so doing we liberated much energy, enterprise and resources to carry out the job which this country wanted done. The most significant of those actions, without any doubt, was the introduction of lower rates of taxes. It is therefore sad now to see higher taxation on these enterprises. I remember the Paley Report on shortage of raw materials, a gloomy report, which most of us have forgotten. Now, thanks to the private enterprise system, we have overcome the shortages. We are now facing other problems in the development of these countries which reintroduction of higher rates of taxation in this form will undoubtedly harm.
These provisions will harm the small businesses and future enterprises in these overseas countries. The bigger enterprises, the established companies, of course, will be able to carry on. They will not be affected to that extent except, possibly, in the case of oil companies, whose affairs have been discussed in some detail today. This is an added—even though a marginal—discouragement, when one remembers the existing over-taxation of all those who are trying to get on with the job. It is depressing

for them that we should be going backwards to the restrictive action which we saw in the years after the war—restrictive action which we do not believe is necessary in today's circumstances.
I wish to take the first three Amendments in the order in which they appear on the Paper. So far, the Committee has heard of the general effect—as far as anyone can estimate it—and in previous debates we discussed the Capital Gains Tax and Corporation Tax. I am sorry that I was not here for the debate on the overseas trading corporations, but I was away on Parliamentary duties. Whatever the merits of the taxes we discussed earlier, I believe that this tax will do considerable harm. I realise that there is a good argument for it, because I have been studying this for some time.
What I dislike is that it will be administered by a Socialist Administration. Sometimes, a system which may have advantages as well as disadvantages, if properly administered, is not too bad, but if it is administered by a Socialist Administration with restrictive and reactionary views on the economy of the country, I believe that it will not be to the benefit of British industry, commerce and enterprise.
Whatever is said, the proposals of the Chancellor will remove intact a larger amount between a company's gross profit and the net to be received by the taxpayer. That must inevitably lead to a restriction on the availability of capital for further investment in British and overseas enterprises, whether public or private. I fear that it is the intention of the Government, of all good Socialists—if that is not a contradiction in terms—eventually to remove all profit from the free enterprise system. I would recall very briefly what Mr. Chambers, I mean Sir Paul Chambers—I forgot the change, in these days of instant honours. I would say, on behalf of everybody in the Committee, that this is a very well-deserved honour and one which I believe is long overdue. No one has worked better for the country, both at the Inland Revenue and at Imperial Chemicals.
It was in his former capacity, I think, that he said in 1947:
What can ruin Britain is the efficiency of the tax-gathering machine and the honesty of the taxpayer.


It seems to me that very few hon. Members who have spoken in these debates have estimated or can estimate the effect of these taxes, including this one, over a long period. Certainly, as a company director, one cannot do so, when 400 amendments are now proposed by the Government. One can only put one's papers aside until the Bill is an Act and then see what the situation is.
Having been here for as long as I have, I am sure that it is the intention of Socialism to defeat and to replace the free enterprise capitalist system. We do not hear very much nowadays about Clause 4, but this Amendment is clearly one of the taxes on the long term which is aimed at destroying, abroad as well as in this country, the private enterprise capitalist system. The future prosperity of this country at home and abroad depends on this system, as did our past prosperity.
7.45 p.m.
In this Finance Bill, we have had Capital Gains Tax, Overseas Trading Corporation taxation and Corporation Tax, which, with death duties and other forms of taxation, means—and deliberately means—that there will be a slow strangulation of the free enterprise system. Certainly, Clause 60, which we seek to amend, will help to do that unless we are careful. I recall—

The Deputy-Chairman (Sir Samuel Storey): The hon. Member is getting very wide of the Amendment which we are now discussing.

Mr. Dodds-Parker: I was only about to say that I recall very clearly the strenuous efforts of hon. Members on this side—particularly my hon. Friend the Member for Liverpool, Wavertree (Mr. Tilney)—to introduce the overseas trading corporations. It took a good deal of hard work to get the idea accepted, even by the Tory Government of those days.
There is no doubt, certainly in my mind, that these corporations worked to the very great benefit of this country and of the overseas countries where they have been working. In those days there was no suggestion from the other side of the Committee, so far as I remember, that these forms of trading corporation were wrong. Our aim was to help to

develop under-developed territories, particularly in the Commonwealth. I remember, in particular, the right hon. Gentleman who is now Secretary of State for Wales and the Minister of Overseas Development working very hard—admirably and rightly so, in my opinion—to develop this form of overseas investment to help the people entrusted to our care.
While the Ministry of Overseas Development can, of course, put a considerable amount of infrastructure into these countries, I believe that it is the individual company operating there which will do the real job of creating the wealth for the benefit of the populations concerned.
Unless this Clause is amended as we have suggested, it will not carry out our intentions and what the House intended in 1954 when this form of trading corporation was introduced. As my right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) has said, what we want in these countries is capitalism and not just capital. We have to encourage people there to create and develop wealth by their own efforts. This is, of course, largely a matter of management, which I will not go into this evening, rather more than simply the provision of money. Just as we in this country are willing to introduce teachers and managers, from North America, for instance, so I believe that many countries have been helped by these overseas trading corporations to invest not only in buildings and equipment but in managers.
As Sir Paul Chambers also said recently, investment brings orders for equipment and so brings with it wealth and job creation both here and overseas. At the same time, however, this investment must be reasonably profitable. Certainly the history of the past few years has not shown that great excess of profit which has been implied from time to time from the other side of the House. I should like to think that the First Secretary is taking some interest in this problem, because this is, obviously, of vital importance to the whole future of the country. I do not blame right hon. Members opposite for their dislike of the entrepeneur. Perhaps they do not like their dentist, but if they want material benefit they have to put up with these disadvantages. If they want prosperity,


they have to give some reward to the people who are doing the job. What one sees at the moment is the slow closing of all the ways in which those who go overseas can earn their reward. It is not in order for me to suggest that the Chancellor should see what has been happening in Eastern Europe, and particularly in Czechoslovakia, since 1963, but it is apt in the context of investment.
In the 20 years I have been in the House this is infinitely the worst Finance Bill that I have seen. There was nothing like this in the six years after the end of the war. If Clause 60 is ever put into effect it will handicap Chancellors of the Exchequer in raising standards for a considerable time. We are back to the old days of levelling down. It is a most cynical reversal of the Socialist claim to help those throughout the Commonwealth, after all that we heard at the last election. I put it to the Chancellor that if he cannot accept Amendment No. 556 he should at least say something favourable about Amendments 554 and 555 and should promise to look at the matter again so that there are some modifications of the present policy on Report.

Mr. Tilney: I rise to thank my hon. Friend the Member for Cheltenham (Mr. Dodds-Parker) for what he said and to support what others of my hon. Friends have said in the debate. I have some sympathy with the Chancellor in his endeavours to tackle the balance-of-payments problem.
I was much interested by what was said by the hon. Member for Birkenhead (Mr. Dell), although I do not accept his figures, for it is wrong to lump these figures together globally. If there are places in which investment has not helped exports, it is a question of looking into the whys and wherefors and not of dealing globally with investment overseas, which I know in many cases helps exports; it is wrong to deal with such investments globally to their detriment and to the detriment of Britain. There may be an argument for reducing investment in the United States and Western Europe, but by dealing a blow at new investment overseas the Chancellor is hurting not only developing countries but

also investment overseas which has been in those countries for many years.
It was surprised by what the Chancellor said about overseas trading corporations. I believe he said that they were not of benefit to Britain.

Mr. Callaghan: I said that they did not bring any tax revenue back.

Mr. Tilney: I declare my interest as a director of an overseas trading corporation responsible for millions of £s of exports and paying very substantial Income Tax and Surtax, and also a great deal in rates in my home city. Does the Chancellor feel that that is of no benefit? His intervention surprised me. I believe that he is making an attack on the developing countries.
The hon. Member for Westhoughton (Mr. J. T. Price) and, in a singularly ill-informed speech, the hon. Member for Buckingham (Mr. Maxwell) attacked the Shell Transport and Trading Company. It is only fair to put on record that the company has not been irresponsible in paying little or no Income Tax. It is as well to bear in mind that companies engaged in all sorts of different activities have a relatively free choice between investment overseas and investment at home in many types of industry. But this is not so with the oil industry. Its existence and its operations are dictated by geography and geology, and it has to do its business where the oil is and where it is needed or else cease to operate.
It is worth putting on record, as the company has been attacked in this debate, that the calculations in the Shell Group alone for the period 1954–64 show that it obtained for the United Kingdom imports of oil to the value of £1,2000 million against a net foreign exchange outflow over the period of only £150 million. Put in another way, as the chairman said,
During this period the group's operations resulted in currency gains which were sufficient to finance the whole of its overseas expansion and, in addition, to supply the United Kingdom with over 30 per cent. of its oil requirements at a minimum cost in foreign currency.
It is reprehensible that some hon. Members opposite attack a company as great as that for dodging its full share of taxation.
Like my hon. Friend the Member for Essex, South-East (Mr. Braine) I have had a certain amount of correspondence on this subject. He had had a letter from Malawi. I have had a letter from Singapore which reads:
Both here and elsewhere in Malaysia great strides are being made in capital development, both of factories and housing, as well as roads. The only back-pedalling is among the British-owned plantation companies whose replanting programmes are badly hit by the British Budget.
I hope that the Chancellor will consider very carefully the effect of his Budget in the long term—despite the help which he has given over the next few years. It is not the immediate future which is of concern, because he will get no benefit immediately for the balance of payments. We are discussing a matter of principle. Let us bear in mind that if all earned profits are distributed the new method will mean that a Malayan resident company will pay 40 per cent. tax on profits whereas a United Kingdom registered company—and there are so many—will pay 65 per cent. tax. Owing to the lower taxation in Malaysia, in years to come we must expect take-over bids.
In many ways the Chancellor is a trustee for the assets of Britain. Does he want deliberately to depreciate those assets so that they will have to be sold in some way at a lower price than they are worth? Will he bear in mind that over 50 years ago, through various independent small capitalists, this country invested about £70 million in rubber plantations in Malaya? These are worth three or four times more than that figure today. Very little more capital has been sent from this country in the last three or four decades, and yet there is an annual return on that £70 million of approximately £25 million—surely a remarkable record. The Chancellor is risking the deliberate depreciation of our assets not only in Malaysia, but in India, Pakistan, Ceylon and elsewhere, because there are many foreign and many indigenous capitalists who would willingly buy what is an attractive proposition at a knock-down price.
8.0 p.m.
Will he also bear in mind that whatever the United Kingdom receives from Malaysia is under the control of the

Malaysian Government, which has not hitherto put any restrictions on remittances to this country? That applies also to Nigeria and many other poor overseas countries, and there are many of them in the Commonwealth.
The hon. Member for Birkenhead said that investment had been falling because it had not been profitable, but I suggest that investment in Asia and Africa has been falling over the last few years or so because certain individual countries there have been too Socialist minded, and have made it impossible to remit profits—

Mr. John Harvey: Ceylon.

Mr. Tilney: Yes, Ceylon is an example of this. There is now no prospect of remittances from Ghana, either. That has been foreseen, and that is why investment in the developing countries has gone down. I believe that this proposed action is very detrimental to the developing countries and to the United Kingdom. If companies owning plantations—be they rubber, tea or coffee—are not allowed to retain as much as the indigenous companies are allowed to retain, they will first stagnate and then decline. I urge the Chancellor to remember that development depends entirely on retained profits. If retentions are inadequate, companies of the first class, of which there are many, will suffer greatly. Will the right hon Gentleman also remember that in certain Commonwealth countries, and Pakistan is one, the tea industry is compelled by the Government to expand its acreage by 3 per cent. a year, and the cost of that expansion can be met only by retained profits. That is often forgotten.
Will the Chancellor of the Exchequer also bear in mind—and I speak as a trader in West Africa who is interested in exporting British cars to some West African countries—that we will not be able to compete with cars from America or Europe unless we can service them properly. That means putting up buildings and service stations, and wherever possible going into partnership with local owners of capital. A letter I have here from someone who knows the West African trade very well states:
If we do not provide the means and the vitally necessary know-how, our competitors in overseas markets—the Germans, Japanese, Italians, Hungarians and others—are only too anxious to do so.


The Government seem to forget the services that go with this trade; the training of people coming here and our own technical "know-how" being given to the developing countries in this way—this to-and-fro method by means of which ideas and "know-how" can be exchanged. They will look to this country and we will look to them; so the friendship and confidence and understanding we have had in the past can be expanded.
Will the right hon. Gentleman also remember that many of the splendid types who used to go into, say, the Indian Civil Service or the Sudan Civil Service are going abroad to train and to teach, and for the time being, until the expatriate can be done away with, are often in charge of local industry.
The hon. Members for West Stirling-shire (Mr. W. Baxter) and Birkenhead showed by their interventions that they had forgotten that tariffs are put up, controls are put up, and that it is quite impossible to export some of our old products to these countries because they are determined to make their own. They may take ancillary components, but the textile mill, the steel mill, and the like, has to be established in that country. Only the other day I was talking to a director who had up to last year had a major export trade with Iran. He said that the only way he could keep his trade there was to establish a factory in Teheran, as otherwise, no matter how efficient he was or how much he cut his prices, it was impossible for him to surmount the tariff barrier. There is no doubt that such people are very worried about the Budget.
The same applies to Australia. When I was there, the complaint was that we were exporting much more to Australia than we were importing from her. One had to argue that the services and, above all, the capital we were giving to Australia more or less balanced things out. That also applies to New Zealand. I believe in multilateral trade, but it is utterly wrong to forget that many countries rely on the investment of British capital to more or less balance their trade with this country.
I accept it from the Chancellor that because of balance of payments difficulties there is a need to cut some forms of

aid, but I would prefer to cut the public rather than the private aid. I believe that private aid will get a return of, say, 9½ per cent. or 10 per cent., pay 5 per cent. or more in taxes in the developing countries, but that some money will still come back here as well. Public aid is often a present and, in any case, bears interest of far less than 9 per cent. or 9½ per cent.
I urge the Chancellor to look yet again at the overseas trade corporations which have hitherto been enabled by special legislation to compete on equal terms with local companies. He sometimes forgets, I fear, that many O.T.Cs compete with locally-owned and established companies which will pay much less taxation than will companies registered in this country if O.T.C. status is taken away. If he cannot keep the O.T.C. status in respect of all countries overseas, will he please help further those in the Commonwealth, and particularly those in the developing countries?

Mr. Callaghan: We have been four-and-a-half hours on this group of Amendments. I hope the Committee will think it reasonable that I should now put the Government point of view in response to what has been said. We have travelled very widely, from Clause 4 to Eastern Europe. I hope to confine my remarks to the subject of the Amendments. Although in reply to what has been said by hon. Members opposite I must make some comments, I hope to keep them brief, because I shall be doing little more than repeating some of the arguments I have used before in this Committee.
The right hon. Member for Birmingham, Handsworth (Sir E. Boyle), who opened the debate, made, as always, a very well constructed and thoughtful speech. If I was a little impatient, it was because I had heard all the arguments before. I make no complaint about it, but I expected him to deal with the Amendments, as I shall do in due course. I think the Amendments have an effect which he did not realise and which those who put them forward did not realise in relation to what has been proposed. At the present time shareholders in a company resident overseas can be credited, not only for any tax charged on their dividends which is withheld, but also for the appropriate part of the tax paid by the company on its profits—the jargon


phrase is the "underlying tax"—whereas O.T.Cs., which are also mentioned, get complete exemption from United Kingdom taxation on their trading profits.
It is this situation, as well as the quite undue relief which is given for overspill, that these taxation provisions seek to remove. We are introducing a new system of taxation. Therefore, different considerations must apply. It is said by some Members of the Opposition that it is not clear what the effects of the new system of taxation will be and that therefore I should not have acted as hastily as I have done. I must point out that they, too, wish to act hastily, because they want, to make permanent the temporary relief I am giving and, as I shall show, to extend the relief which is at present proposed into something which is, much more favourable to the taxpayer than the existing system.
I can only conclude from this—indeed it has been implicit if not explicit in many of the speeches—that the Opposition want to encourage to an even greater extent than at present investment overseas, unselective though it is—no matter where it may be, no matter what the rewards may be, or in what part of the world it may be. That is the effect of the Amendment. It is a complete "across the board" Amendment. I am speaking of the main Opposition Amendment.
This Amendment is designed, unselectively, to encourage overseas investment in any part of the world, to make it more favourable than investment at home, and to make it more favourable than it is today. That is an astonishing proposition to put forward in the light of the experience this country has had over the last 20 years. I instance it in two ways. It is proposed to give further relief than is given at present by enabling a taxpayer to set off his Surtax liability, or to enable some part of the relief which would be given to be set off against his Surtax liability, a proposition never hitherto advanced no put into force by the Opposition when they were in Government.
Secondly, the Amendment proposes to enable individuals to carry forward any unused part of the relief for any particular year for any number of successive years until it is exhausted. That again is a proposition that hon. Members

opposite have never advanced hitherto, which is not in the existing Statute and which would be bound to make overseas investment even more attractive than home investment is at the present time. The Opposition should be quite clear about what I am sure the right hon. Member for Bexley (Mr. Heath), who is to speak next, knows is their attitude about this matter. Are they saying that they believe the position of the country is such now, or is likely to be in the immediate future, that we should make overseas investment more attractive than does any other leading industrial country, more attractive than it is today, unselective in its effects, although they say they do not know what effect this would have on increasing exports? That is the proposition they are asking the Committee to adopt. That is precisely the effect of the Amendment. I do not see how any responsible Government changing the taxation system could possibly accept an Amendment of this sort.
8.15 p.m.
We are saying in the Clause as it stands that any company operating overseas is entitled to set off tax paid overseas against Corporation Tax chargeable in this country. There is no dispute about that. To that extent double taxation relief will continue to apply. It is generally accepted—this point was raised by the right hon. Member for Handsworth and accepted by me—that it promotes the intercourse of free trade between countries if there are provisions for double taxation relief. I think it would also be pretty universally accepted that the country in which the profits arise should have the first, and may be the major, slice of the taxation to be deducted.
This was the proposition which the right hon. Member made. There is no dispute between us on this. It is for that reason that if the Corporation Tax in another country is, say, 40 per cent., as in the case of Malaysia, which has been quoted to us, a company operating here shall be entitled to set against our Corporation Tax, even if it is as high a 40 per cent., the full 40 per cent. charged in the State of Malaya. This is the purpose, the intention, and the effect of the Clause as it stands. There is no difficulty about double taxation relief.
What the Committee has to consider now is whether we should go further and accept the Amendment which has the effect that a shareholder living in this country shall be entitled to set off against his United Kingdom tax liability the tax paid by the company in which he is a shareholder in Malaysia. In other words, the Opposition is asking that he should be able to satisfy his United Kingdom liability, his liability to our country, because of the payment by his company in which he has invested, by taxation either to a Commonwealth or a foreign government. Although I have mentioned Malaya, this applies equally to foreign governments.
This is bringing the whole of the debate this afternoon down to the effect of the Amendment. This is what we are talking about. Hon. Members opposite may not even fully appreciate what they are doing. Although it is not for me to say, I was a little surprised to see the provisions about Surtax and the carry-forward. I shall not say more about that. The right hon. Member said that he was prepared to drop the Surtax provisions. He could not have considered the matter very seriously if he was willing immediately to drop them. The Committee should not be asked to accept payment of a company's tax to a foreign country as satisfying the liability to tax of the British taxpayer.

Mr. Shepherd: Then for what do we have double taxation relief agreements?

Mr. Callaghan: I have explained that it will be possible to set off Corporation Tax chargeable on the company to the limit of Corporation Tax rate in this country.

Mr. Shepherd: Does the right hon. Gentleman realise that he is undermining and denying the basic concept of double taxation relief, because then not only has the company trading overseas to pay the tax which may be higher in that country but also its shareholders have to pay the tax upon income and Corporation Tax as well?

Mr. Callaghan: Not only am I not denying the concept of double taxation relief, I am doing what I said in the Budget was my intention to do. I am bringing our system into line with the system which has existed in countries

operating the Corporation Tax system ever since it started.

Mr. Shepherd: Not at this rate though.

Mr. Callaghan: I agree. In the United States it is higher. In India it is higher. In Malaya and in Nigeria it is the same. It may not be an answer which satisfies the hon. Member, but this happens to be the tax in the United States where we have a great deal of our investment. When the proposition is put in this way we begin to see that, whatever the merits of the case for overseas investment, which I do not deny, to seek to give the shareholder relief from his United Kingdom liability because a company has paid tax to the United States Government is a ridiculous proposition. It is for that reason if no other that I would invite my hon. Friends to resist this group of Amendments. I do not think that I can put it any more clearly than that, because that happens to be the essence of the situation.
I must, however, deal with the proposition about the future of investment. There is no doubt that because of the existence of our present system, which is extremely favourable to overseas investment, overseas investment has been made on an unselective basis. Although we have heard a great deal about the under-developed and developing countries, that unselective investment does not even go to those countries. As the hon. Member for Liverpool, Wavertree (Mr. Tilney), the right hon. Member for Mitcham (Mr. R. Carr) and the hon. Member for Cheltenham (Mr. Dodds-Parker) have said, it is the case that private investment in those countries has been falling off. The hon. Member for Wavertree gave as a reason for it that they were too Socialistic and charged too high rates of tax, but apparently the hon. Member wants us to go on investing in those countries which are too Socialistic and charge too high rates of tax even though the return on our investment is a poor one.
I feel, and I agree with part of his analysis, that the reason why investment in some of those countries is falling off and in other countries is moving ahead, is that it is more profitable in one set of countries than in another. Undoubtedly investment in the United States, which has been growing, is more profitable than investment in, say, Malawi. The question which I have to ask myself is whether in


our present, past and likely future situation, in view of the strain on our balance of payments, the Government should give permanently special tax advantages for investment in the United States over investment in the United Kingdom. Here we are in a situation in the United Kingdom in which we are short of capital for investment in a great many projects which are known and admitted on both sides of the Committee. We want more roads, houses, hospitals, universities—and so the cry goes on.
We need also more productive investment in our own industrial system. One thing which has been clear in the last ten or twelve years is that the rate of investment in our own industrial system has been lower than that in many other advanced countries. Why therefore in those circumstances should any Government in their right mind give more favourable treatment to those who invest in the United States than they give to those who invest in our own country?

Mr. R. J. Maxwell-Hyslop: Would the right hon. Gentleman be good enough to explain how his argument is relevant? Surely hospitals, universities and roads are not financed by private risk capital.

Mr. Callaghan: I thought that the hon. Member was going to answer my question but instead he has asked me another. As he did not answer mine, I will answer his. Wherever one invests there are two parts to the investment. One is the return to the private citizen who invests. The second is the taxation which the State takes. Investment in the United States, Canada, or anywhere else means that those countries get a return from taxation, when on a similar amount invested in this country it would accrue to this country. That is how we finance our universities. It is part of the answer to those who say that one should not compare the net of tax return from overseas investment against the gross return here, that one must compare it when one is considering the return that one gets because the total product, however divided between State and individual, must be greater in this country than it is abroad. And we give relief for foreign taxation against the company's liability in this country.
There is no case for giving exceptional advantages. I am not saying that they should not be equal. I believe in and want to see foreign investment and investment in the Commonwealth continue. This is essential and important. I have said that so many times that I shall have used soon every cliché in the world except "God is love" in saying it. Everybody knows that it is so; but what we have to guard against is giving exceptional tax advantages to overseas investment over the advantages given to those who invest in industry in our own country. This is basically the case against the Amendment as moved.
I should like to say a few words about Commonwealth countries before I conclude. The right hon. Member for Orkney and Shetland (Mr. Grimond) put two or three points to me with which I should like to deal. One was about existing investment. He asked whether it would not be possible to make a division between existing investments and give a separate rate of tax for them as opposed to the rate of tax charged on new investment. I have considered that but I think that for all practical purposes it would be impossible to make this division. It would be very artificial. I give one illustration in passing. To take the illustration which the right hon. Gentleman himself gave us about the replanting of plantations in Malaya, it would be very difficult indeed to make a division between whether new investment in a rubber plantation in Malaya was designed to replace the existing plantation or to extend into a new field. There are other arguments which I could put to the right hon Member for Orkney and Shetland. I can only tell him that, in my view, trying to make a division really would not help us.
The right hon. Gentleman then asked whether inquiries could be made into the relationship between exports and investment, and other hon. Members raised the same point. I understand that the Federation of British Industries is to make such an inquiry. It will not be a partial inquiry, but, as I understand, it is proposed to employ independent experts who will make an objective assessment of the relationship, a relationship which, as far as I and those who have studied this matter can see, is really not


as close as has been alleged by hon Members opposite. My hon. Friend the Member for Birkenhead (Mr. Dell) was very clear on this subject in the remarkable speech we had from him today.
8.30 p.m.
The F.B.I. intends to pursue this inquiry, and I have told those concerned—I am glad to inform the right hon. Member for Orkney and Shetland of this—that the resources of Government Departments are at their disposal in the sense of supplying statistical information which it is proper to supply. It could not go into confidential matters, of course. I do not think that we could break information down according to individual cases, but global totals, totals by country, and so on can be given. In conversations I have had with representatives of the F.B.I., I have said that they can have all the information now at the disposal of the Government which can properly be made available. I hope that the inquiry will continue, and I shall await its result with keen interest.
In the meantime, the transitional arrangements which I am proposing, and which are extremely costly, will make it quite possible for any adjustments which might be necessary to be made. I must say here that it is not right to suggest that I have acted over-hastily in this matter. Quite the reverse is true. I am equalising the taxation burden. I have already put the argument to the Committee. It is for those who claim that it is necessary to have these special tax advantages in order to secure exports to prove that something different should be done. It is for them to do that, and this is why I am very ready and happy to see the F.B.I. go ahead and do all I can. I hope that that meets the point which the right hon. Member for Orkney and Shetland put to me. No doubt, the F.B.I. will itself indicate the way in which the inquiry will be conducted.
Now, the Commonwealth countries. It is a matter of regret to me that not only has the rate of private investment in these countries been going down but it is now only one-fifth of the total overseas investment from this country, and it is on a declining scale. For the sake of our reputation, I should greatly like us to do more. Because we are an advanced nation with great productive capacity,

we undoubtedly have a duty to help these countries. Not only do I acknowledge this but I am proud of the fact that this country has done and is doing so much. I remind the Committee that, at present, the level of overseas aid to these countries must be running at getting on for £200 million a year out of the British Exchequer, contributed by the British taxpayer.
I have to strike a most unfortunate balance here. I hope that hon. Members opposite will not mind my saying that I should very much like to see this country being more generous and, if we had not got our balance of payments problem, we could be. It is not much use asking us to spend more on overseas aid at a time when the balance of payments is only gradually being brought under control. It is well known to the Committee that the £800 million deficit last year will, I trust, be reduced to about £300 million this year, but we shall still be in debt. We are still running at a deficit. I cannot emphasise this often enough. I am sure the Committee will agree that I have never tried to conceal the facts from it on this.
To be knowingly operating at a deficit, as we are, and which we have chosen to do because we want to keep expansion running in this country and not to destroy the confidence of industrialists, is a very serious undertaking on the part of the Government. I can only do it because I believe that we can get ourselves into equilibrium again by the end of 1966 and because we have got the resources and the capacity to enable us to finance that deficit. But it is a serious undertaking for the Government. I think that everyone on both sides of the Committee recognises that position.
To ask that I should add to the burden on the balance of payments by increasing the amount of aid in this particular year is really to ask me to take a graver risk than is justified. If we were to do so at a time when we are doing our best to save overseas expenditure in many other fields, we should not, I believe, be behaving with a proper sense of responsibility.
It has been said that foreign countries, if they see that we are not investing overseas, will believe that we are "Little Englanders". That is not my


experience of what foreign countries are saying. They are saying that we are doing too much overseas and should be cutting down on it. I think that they will react much more favourably to a nation which is seen to be trying to curb and control its uncontrolled overseas investment, and not to give it undue advantages, than to a nation which goes on giving such advantages even though it is heavily in debt and owes money to those nations which have lent it to us. I must say to the Committee that I cannot accept this argument.
Now for the future. I regard it as a first priority when the balance of payments is in a reasonable state—I go no further than that because I do not want to be precise about it—to give as much aid as this country can afford in pursuance of our duties and responsibilities.
The right hon. Member for Bexley made a speech at the U.N.C.T.A.D. last year which received a great deal of support and applause—and rightly so. I only wish that we could follow through. Unfortunately it is not possible to follow through in the present situation; but I want to say to the right hon. Member for Mitcham that as soon as it is possible to follow through, everyone in the Committee as a whole will want to see us pick up the threads.
I do not believe that the substantial and serious rundown of private investment in the developing countries will be accentuated by these tax changes. It would have run down naturally; indeed it has been running down for some time. It is our task, both in aid from this country as the balance of payments becomes right and also in using the additional liquidity necessary in the world, for us to try to help these countries both as a nation and internationally. I believe that is a far better way of doing it than to give special tax reliefs which will only accentuate the balance of payments problem.
I have now spoken for 25 minutes and I hope that it will be thought by the Committee—or at least a majority, if only a narrow majority—that I have satisfactorily answered the points raised. I hope right hon. and hon. Members will think that I have made an overwhelming case for not accepting the Amendment and I ask the Committee to reject it.

Mr. Heath: Perhaps it is convenient for me now to follow the Chancellor although I know that some of my hon. Friends who have been present the whole day are still anxious to contribute. We are delighted to see that the right hon. Gentleman has returned to a more equable mood. He has delivered a speech of considerable interest which also covered a fairly wide range. When he concludes his speech by referring to international liquidity, which no one on this side dared to raise, it no longer lies in his mouth to suggest that we wandered rather wide on the Amendment.
We have had a useful debate on one of the major and most important features of the Corporation Tax. We are debating it at a time when the Commonwealth Prime Ministers are assembling in London. I doubt whether on their agenda there is a more important subject than the impact of this tax on their own countries and the Committee has been right to devote this amount of time to it.
Perhaps I can recall to the Chancellor a French maxim with which those of us engaged in international negotiations have been familiar for some time. It is, Qui presse doit payer. It means that if you break the speed limit you must cough up. That applies to this Committee as to other things. If one tries to break its speed limit the price must be paid.
What has emerged from the debate is, first, that it has pointed, as the debate did yesterday, to the need for a full examination before a decision is taken. The Chancellor of the Exchequer mentioned this in passing and he said that we had claimed that the facts were not clear. However, this, of course, is the main point which has been made by some of his hon. Friends in speeches which were well-informed and valuable. They all said that they wanted to have the facts clear, and the only reason why they supported the Corporation Tax, as the hon. Member for Birkenhead (Mr. Dell) and, on other occasions, the hon. Member for Meriden (Mr. Rowland) have said, is that the transitional arrangements which have been made by the Chancellor will now give time for the facts to be made clear. Hon. Members opposite have said that they support the Corporation Tax because it will provide that time.
However, I must say that this is a very expensive and damaging way of getting time in which to examine the problem of overseas investment, its impact on this country, on the developing countries, on the Commonwealth and the world as a whole. We cannot hope to reconcile the differences between us, but I believe that the debate has pointed to the need for information, and I therefore welcome the Chancellor's assurance that he, too, welcomes the investigation which is to be made.
The second point I have to make is that there is no support for the Chancellor's policy towards overseas investment outside his own party, and even in his own party it is sometimes lacking. He rather derided my right hon. Friend the Member for Birmingham, Handsworth (Sir E. Boyle) for quoting the Chairman of the Booker Group in his annual report, but, of course, that was not a reference to the transitional arrangements but to the permanent effect of the tax. I can quite understand that the Chairman of the Booker Group is gratified by the concessions which the Chancellor has made and to which reference will no doubt be made on Clause 79. Many people are gratified by them and are grateful to the Chancellor for providing better transitional arrangements.
But that does not alter the fact that what the Chancellor is doing in the Clause, and what we are challenging in the Amendment, is to make a permanent arrangement which, when the transitional period of seven years is over, will be the fundamental basis of this investment. The Chancellor has been clear and frank about that. What people outside—industrial companies which have to invest overseas, or mining corporations, or oil companies, or the countries in which those companies operate—object to is the permanent basis on which overseas investment is to take place from this country in the future, and that is what we are challenging in the Amendment.
The Chancellor based the first part of his reply to the debate on the assertion that our Amendments meant that we wanted to encourage investment even more. I will come to the point of whether that is the correct interpretation of the Amendments as we understand them, but we are perfectly prepared to

stand corrected. Our general position is that we do not want to encourage investment even more and that we want the status quo to be broadly maintained until we can come to a position in which we can know one way or the other where investment is to pay and where not and then to express the policy which, considering the interests of this country, the Commonwealth and the developing countries together, we can say to be the right policy to be followed. Admittedly, this must depend on the circumstances of our balance of payments as well.
The Chancellor's first criticism was that the Amendments were unselective or indiscriminate. But, of course, his Bill is unselective and indiscriminate. If he accuses the present system of being unselective and indiscriminate—and I accept that criticism and it has been reiterated from both sides of the Committee—so is the Bill unselective and indiscriminate in exactly the same way.

Mr. Harold Lever: In the opposite way.

Mr. Heath: It may be more unselective towards some firms than at the moment and less unselective towards others. I accept that, but over the field as a whole it is indiscriminate and unselective.
There were three features in which the Chancellor thought that the Amendments would be more encouraging. There was first the underlying tax which exists in the present situation. We are not making it more favourable than that, although more favourable than the Bill provides, restoring the status quo.
The second feature is the introduction of Surtax. The plain fact is that this situation is most unlikely to arise. It will arise only rarely. There has to be sufficient spillover available to deal not only with Income Tax but Surtax, and the number of occasions or places in which that will occur will be comparatively rare.

Mr. Callaghan: Mr. Callaghan indicated dissent.

Mr. Heath: That is our information. If the Chancellor doubts it, he can let us know some other time. I think it is a perfectly logical position. If the Chancellor is worried about Surtax and restoring the status quo and says it would make it more favourable, then as my


right hon. Friend for Handsworth, said at the beginning, we are perfectly prepared to accept it. We put it in because we thought it was logical and the number of cases where it happened would be very small.
8.45 p.m.
Thirdly, he spoke of carrying forward the unused part of the relief. This again seems to be perfectly logical. On the other hand if it is not restoring the status quo but is making it even more favourable, if that can be shown, then we will not stand on that point, because broadly speaking we want to have the present arrangements until we can show a way in which there should be a selective and discriminatory form of investment. That is our objective.

Mr. J. T. Price: The right hon. Gentleman is changing his ground from the original position taken up.

Mr. Heath: What I am saying, perfectly frankly, is that I believe that the present situation ought to be maintained broadly. I do not think from the information we have that the question of Surtax is going to make very much difference. If it does and if it offends the susceptibilities of the hon. Gentleman let us merely cover it as far as Income Tax is concerned. The Chancellor will agree that is bound to be the major part in any case and, as far as the second feature is concerned, the carry forward of the unused part of the relief, that is perfectly logical, particularly in view of the low returns which some of these types of companies have in the developing countries such as Malawi, which the Chancellor has discussed.
The major part of the Chancellor's argument was this: he said that the Opposition are arguing that payment of tax by a company to a foreign Government should satisfy the requirements of taxation in this country. That was the point which he emphasised and which was also emphasised by the hon. Gentleman the Member for West Stirlingshire (Mr. W. Baxter) and this is really the main thread running through the Chancellor's argument. It has been emphasised that this position is at present the international position. It was broadly accepted in 1947 by the Labour Government and has been carried on in this country since and is the position in international affairs at

this moment as we understand it. [Interruption.] We will not even argue about, the international position, but I think the hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever) put this forward. We certainly believe it is the case and most people who have commented on the effects of this tax believe it is the case.
Even if the Chancellor does not accept that, he went on to discuss the merits of overseas investment. He does not deny the merits of overseas investment, but he went on to say that the relief of shareholders from their tax responsibility here by this taxation is ridiculous. This is a very clear position. He said that and he could not have stated it more clearly. He is saying he is prepared to forgo the advantages of overseas investment to this country, their benefit to the Commonwealth and to the developing countries of the world because he believes that shareholders here are getting a benefit which they ought not to get. That is the Chancellor's position and this is the issue which faces us at the moment.
When the Chancellor says that he is concerned with the balance of payments, may I say to him that this is what leads to our doubts about his concern in practice? He is putting this particular doctrine in front of the benefits which come to the balance of payments from overseas investment. This is really the fundamental difference between us. It is of the utmost importance that we should get this clear. There are other developments—the division between a company and its shareholders. It was held that in respect of overseas investment one can treat shareholders roughly as one likes and one does not have to look for the consequences. We do not believe this to be true and I do not want to go over that argument again, but it affects the degree of overseas investment which we shall get.
The Chancellor put to us the question of whether we should invest in the United States rather than in the United Kingdom because he chose the United States as being the place where it would be most favourable. He went on to give the sort of investment which we needed in this country. Most of the examples were for social expenditure and at the end he came on to mention plant and manufacturing industry. That, again, is indicative


of the same attitude of mind—the attitude that if we can get the return in this country and get the tax and build roads, as the Chancellor said, or schools, all of which are desirable, we cut out investment in the United States, which helps us in the balance of payments, which, the right hon. Gentleman says, he cannot deny. This, again, is the difference between the two sides of the Committee. It is impossible to reconcile us on this, but we must get it straight that this is the real difference which exists between us.
Before I deal with the Chancellor's reference to the Commonwealth, perhaps I may refer to the hon. Member for Birkenhead, whose speeches are always of the greatest interest. The hon. Member said that before one took part in a debate of this kind, one should get a little information and that he had got a little information before he came here. It does not need me to remind the hon. Member that a little information is a dangerous thing.
I pay tribute to the hon. Member's information, because he has specialised in these matters. My own experience, however, both in the European negotiations in dealing with the Commonwealth arrangements and in the U.N.C.T.A.D. negotiations and the G.A.T.T. negotiations, both of which were held in Geneva, is that it is extraordinarily difficult to find out detailed information and extraordinarily dangerous to generalise about these things. We all of us, perhaps, have a slight tendency to do this and one can come quickly to generalisations which afterwards can barely be substantiated.
I have been as intrigued, as the hon. Member has been, by the difference between American experience in investment abroad and the effect on American exports and British experience. What is even more interesting is which of the differences between American investment abroad and our own streams of investment abroad really lead to this difference. I believe—and this is a factor which was not mentioned by the hon. Member—that a considerable amount depends upon the industrial structure of the two countries.
It is true to say of American investment in the chemical industry in this country

that it is very profitable. It has led to the supply of chemical raw materials almost entirely from the United States. This is part of the industrial structure of the American firm and of American industrial traditions. In this country, we do not have the same traditions. It does not always happen—it might do with I.C.I.—that when capital is invested abroad, this country is the best place from which to get machinery, and particularly sophisticated machinery. This is not a factor or feature of investment. It is much more a characteristic of the industrial structure of this country compared with other countries.

Mr. Grimond: The right hon. Gentleman talks about the chemical industry and its raw material. Is it not true that the main feature of I.C.I. plant in Europe is that its raw material comes from this country?

Mr. Heath: I added a reservation about I.C.I. In a large part of the world, that is true. It would have been better to take an example of a different industry in which we normally have an interest abroad but for which very often the sort of plant and machinery which we can supply is not necessarily that which is required.

Mr. Dell: Surely, the right hon. Gentleman is making exactly the case that I and hon. Friends of mine on this side have tried to make: that for one reason or another, despite what hon. Members opposite have said, our investments overseas have not led to the sort of increase in exports which hon. Members opposite expected.

Mr. Heath: That is a generalisation of the kind that I should like to try to avoid. We had an example in the case of Australia. It is true—it applies to New Zealand as well, I think—that as a result of tariff policy there, certain of our industries have been very hard hit. Had the situation been left like that, our exports to the Commonwealth would have declined. They have not declined absolutely, but proportionately they would have declined even further.
It is the fact that there has been investment in actual plant producing those goods inside the tariff wall which has led to our being able to get returns from it


through management, "know-how," royalties, returns on dividends and, very often, the supply of parts, and so on. So, without going into details as to which country and which industry, it is extra-ordinarily difficult to reach any firm conclusions about it, and that was really the point I wanted to make about the hon. Gentleman's very interesting speech. It confirms the Chancellor's point about the value of any exploration which is made.
This leads me to the point about the Commonwealth and, in conclusion, to the general attitude towards this particular aspect of the tax. This is, as I have said, a permanent decision. The Chancellor could have kept the status quo, and could have said, "I believe that this situation is not satisfactory. We hive now got to investigate it. Then we will move on to a more discriminating, selective way of dealing with our overseas investment." He could have said that. He has chosen not to do it. I think the result is that he has upset a large part of the industry of this country; he has upset a large part of the Commonwealth and all the developing countries; and I think he is damaging British interests. He is doing this without being able to prove or disprove one way or the other what the situation is.
This I do not believe is a wise policy. The hon. Gentleman said that he would reduce overseas expenditure. There are various other measures which the Chancellor could have taken which would have a direct impact on overseas expenditure, and which, indeed, he may still wish at some future time to take. He had, as the Leader of the Liberal Party said, in any case got wide powers outside the sterling area for dealing with this particular problem. But what he is doing—and I think the Chancellor overlooked this in his concluding words—and it is one of the main objections which we have, because of the consequences of the tax, is not only cutting down future investment but is damaging investment which is already there.
It is also interpreted as an attack on the shareholders themselves. I do not want to go into details of these. I mention them only because I do not believe that what appears to be an attack on existing investment and an attack on shareholders gives foreigners any confidence whatever. This is one of the

fundamental features of the present situation. It is thought that legislation is being introduced which damages companies which have already invested abroad. Whether they are oil companies, whether they are companies with plantations, whether they are mineral companies, or whether they are overseas trading corporations, their activities will be damaged. It will be much more difficult for them to raise capital abroad, more difficult for them to raise capital in this country. So they will be squeezed in both ways. It will damage them, and this is part of a general attack on shareholders. This does not impress foreigners. Indeed, it raises their apprehensions.
So far as the Commonwealth is concerned, this is in fact a moment when the Chancellor could possibly have removed apprehensions which are at the moment in the Commonwealth Prime Ministers' minds—if he had not pursued this in the first instance; and he could have given a considerable inspiration to the developing Commonwealth. Indeed, I do not think it is the return from the developing Commonwealth which worries investors; I do not think that is the major part of what worries them. It is far more the political risks involved in so many developing countries.
This is really what affects investors. I believe, and this was certainly, I think it is not going too far to say, the view of those gathered in U.N.C.T.A.D. at Geneva a year ago. It is the political risks. Those countries like the United. States and Japan which have been able to get investment assurance have to a large extent had those risks removed. The present Chancellor and his predecessor were trying to get European or O.E.C.D. insurance risk arrangements, which I think would have been a very good thing. It is the political risks which often are much more damaging to private investment than the difference which there may be and which at times may be marginal between the returns from different countries, and this was recognised at Geneva, and what went with it was the belief that private investment and management and know-how and the things which grow from them bring greater benefits to developing countries than Government aid which very often, at any rate, is thought to have political strings attached to it. Therefore, as I have said, I do not believe that


any increased Government aid is the same when it is substituted for what has previously been private investment.
9.0 p.m.
The Chancellor is obviously not going to accept the Amendment. He has missed an opportunity to remove apprehensions which exist in the minds of the Commonwealth Prime Ministers, and in the developing countries in particular. In 1962 the Commonwealth Conference discussed Europe. It was obviously a contentious matter. Its object was to make the Commonwealth stronger and to enable us to have greater investment in the Commonwealth. Since then many of the developing countries of the Commonwealth have made, and are in the process of making, their own arrangements with the European Economic Community, and, as they are independent countries and believe that this is in their own interests, I welcome the fact that they are gaining these benefits. At the coming Conference they will discuss measures which will weaken the Commonwealth, because they will lead to a diminution of investment, which affects particularly the developing countries. This I deeply regret, and I do not believe that the two things are entirely unconnected.
I agree with the Chancellor that it is difficult to carry out the U.N.C.T.A.D. undertakings with a Bill of this kind.

Mr. Callaghan: I did not say that.

Mr. Heath: Then it was the hon. Member for Birkenhead who said it.

Mr. Dell: What I was saying was that it was difficult to carry out this sort of agreement in view of the balance of payments situation left to us by the previous Government.

Mr. Heath: We will not go into that argument, because we have kept this debate on a fairly high and non-controversial level, but of course I am prepared to hit back if the hon. Gentleman wants it.
With this Bill it will be difficult to carry out the obligations which we accepted in the final agreement at Geneva. We believe that we should maintain the present position until we have a much more thorough understanding of the benefits, and disadvantages where they exist, of investment overseas to this country, to the Commonwealth, and to the developing countries. I believe that the Chancellor would have been wise to have had an arrangement which carried on the status quo, and not to have damaged it as he is doing. For these reasons, I urge my right hon. and hon. Friends to carry the Amendment when the appropriate time comes.

Question put, That those words be there inserted:—

The Committee divided: Ayes 193, Noes 198.

Division No. 177.]
AYES
[9.2 p.m.


Agnew, Commander Sir Peter
Buck, Antony
Errington, Sir Eric


Alison, Michael (Barkston Ash)
Builus, Sir Eric
Eyre, Reginald


Allan, Robert (Paddington, S.)
Burden, F. A.
Fell, Anthony


Allason, James (Hemel Hempstead)
Buxton, Ronald
Fletcher-Cooke, Charles (Darwen)


Anstruther-Gray, Rt. Hn. Sir W.
Campbell, Gordon
Fraser, Rt. Hn.Hugh(St'fford amp; Stone)


Astor, John
Carlisle, Mark
Fracer, Ian (Plymouth, Sutton)


Awdry, Daniel
Carr, Rt. Hn. Robert
Gammans, Lady


Baker, W. H. K.
Cary, Sir Robert
Gardner, Edward


Balniel, Lord
Channon, H. P. G.
Gibson-Watt, David


Barber, Rt. Hn. Anthony
Chataway, Christopher
Giles, Rear-Admiral Morgan


Barlow, Sir John
Chichester-Clark, R.
Gilmour, Ian (Norfolk, Central)


Batsford, Brian
Clark, William (Nottingham, S.)
Gilmour, Sir John (East Fife)


Bell, Ronald
Cooke, Robert
Glover, Sir Douglas


Bennett, Sir Frederic (Torquay)
Corfleld, F. V.
Goodhew, Victor


Bennett, Dr. Reginald (Gos amp; Fhm)
Craddock, Sir Beresford (Spelthorne)
Gower, Raymond


Berkeley, Humphry
Crowder, F. P.
Grant, Anthony


Berry, Hn. Anthony
Curran, Charles
Grant-Ferris, R.


Bessell, Peter
Dalkeith, Earl of
Gresham Cooke, R.


Bingham, R. M.
Davies, Dr. Wyndham (Perry Barr)
Grieve, Percy


Birch, Rt. Hn. Nigel
d'Avigdor-Coldsmid, Sir Henry
Griffiths, Peter (Smethwlck)


Black, Sir Cyril
Dean, Paul
Grimond, Rt. Hn. J.


Blaker, Peter
Deedes, Rt. Hn. W. F.
Hall, John (Wycombe)


Box, Donald
Dodds-Parker, Douglas
Hall-Davis, A. G. F.


Boyle, Rt. Hn. Sir Edward
Doughty, Charles
Hamilton, Marquess of (Fermanagh)


Brinton, Sir Tatton
Eden, Sir John
Hamilton, M. (Salisbury)


Bromley-Davenport, Lt. -Col. SirWalter
Elliot, Capt. Walter (Carshalton)
Harris, Frederic (Croydon, N.W.)


Brown, Sir Edward (Bath)
Elliott, R. W.(N'c'tle-upon-Tyne,N.)
Harris, Reader (Heston)


Bruce-Gardyne, J.
Emery, Peter
Harrison, Col. Sir Harwood (Eye)




Harvey, John (Walthamstow, E.)
Marten, Neil
Sharples, Richard


Hastings, Stephen
Mathew, Robert
Shepherd, William


Hawkins, Paul
Maude, Angus
Sinclair, Sir George


Heald, Rt. Hn. Sir Lionel
Mawby, Ray
Smith, Dudley (Br'ntf'd amp; Chiswick)


Heath, Rt. Hn. Edward
Maxwell-Hyslop, R. J.
Spearman, Sir Alexander


Hendry, Forbes
Maydon, Lt.-Cmdr. S. L. C.
Steel, David (Roxburgh)


Higgins, Terence L.
Mitchell, David
Studholme, Sir Henry


Hill, J. E. B. (S. Norfolk)
Monro, Hector
Summers, Sir Spencer


Hirst, Geoffrey
More, Jasper
Talbot, John E.


Hobson, Rt. Hn. Sir John
Morrison, Charles (Devizes)
Taylor, Edward M. (C'gow.Cathcart)


Hooson, H. E.
Mott-Radclyffe, Sir Charles
Taylor, Frank (Moss Side)


Hopkins, Alan
Munro-Lucas-Tooth, Sir Hugh
Temple, John M.


Hordem, Peter
Murton, Oscar
Thorpe, Jeremy


Hornby, Richard
Neave, Airey
Turton, Rt. Hn. R. H.


Hunt, John (Bromley)
Nicholls, Sir Harmar
Tweedsmuir, Lady


Hutchison, Michael Clark
Nicholson, Sir Godfrey
van Straubenzee, W. R.


Jenkin, Patrick (Woodford)
Nugent, Rt. Hn. Sir Richard
Vaughan-Morgan, Rt. Hn. Sir John


Johnston, Russell (Inverness)
Osborn, John (Hallam)
Walder, David (High Peak)


Jopling, Michael
Osborne, Sir Cyril (Louth)
Walker, Peter (Worcester)


Kerr, Sir Hamilton (Cambridge)
Page, John (Harrow, W.)
Walker-Smith, Rt. Hn. Sir Derek


Kershaw, Anthony
Page, R. Graham (Crosby)
Ward, Dame Irene


Kilfedder, James A.
Pearson, Sir Frank (Clitheroe)
Weatherill, Bernard


King, Evelyn (Dorset, S.)
Peel, John
Webster, David


Lancaster, Col. C. G.
Percival, Ian
Wells, John (Maidstone)


Langford-Holt, Sir John
Peyton, John
Whitelaw, William


Litchfield, Capt. John
Pounder, Rafton
Wills, Sir Gerald (Bridgwater)


Lloyd, Rt. Hn.Geoffrey(Sut'nCdfield)
Powell, Rt. Hn. J. Enoch
Wilson, Geoffrey (Truro)


Lloyd, Ian (P'tsm'th, Langstone)
Price, David (Eastleigh)
Wise, A. R.


Lloyd, Rt. Hn. Selwyn (Wirral)
Prior, J. M. L.
Woodhouse, Hon. Christopher


Longbottom, Charles
Pym, Francis
Woodnutt, Mark


Longden, Gilbert
Ramsden, Rt. Hn. James
Wylie, N. R.


Lubbock, Eric
Redmayne, Rt. Hn. Sir Martin
Yates, William (The Wrekin)


McAdden, Sir Stephen
Ridley, Hn. Nicholas
Younger, Hn. George


Mackie, George Y. (C'ness amp; S'land)
Ridsdale, Julian



Maclean, Sir Fitzroy
Roberts, Sir Peter (Heeley)
TELLERS FOR THE NOES:


Macleod, Rt. Hn. Iain
Rodgers, Sir John (Sevenoaks)
Mr. Martin McLaren and


McMaster, Stanley
Roots, William
Mr. Ian MacArthur.


Marples, Rt. Hn. Ernest
Royle, Anthony





NOES


Allaun, Frank (Salford, E.)
Dell, Edmund
Hughes, Emrys (S. Ayrshire)


Alldritt, Walter
Diamond, John
Hughes, Hector (Aberdeen, N.)


Allen, Scholefield (Crewe)
Dodds, Norman
Hunter, A. E. (Feltham)


Armstrong, Ernest
Doig, Peter
Irving, Sydney (Dartford)


Bacon, Miss Alice
Driberg, Tom
Jackson, Colin


Barnett, Joel
Duffy, Dr. A. E. P.
Janner, Sir Barnett


Baxter, William
Dunn, James A.
Jeger, Mrs. Lena(H'b'namp;St.P'cras, S.)


Beaney, Alan
Dunnett, Jack
Jenkins, Hugh (Putney)


Bellenger, Rt. Hn. F. J.
Edelman, Maurice
Johnson, Carol (Lewisham, S.)


Bence, Cyril
Edwards, Rt. Hn. Ness (Caerphilly)
Johnson,James(K'ston-on-Hull, W.)


Benn, Rt. Hn. Anthony Wedgwood
Edwards, Robert (Bilston)
Jones, Dan (Burnley)


Bennett, J. (Glasgow, Bridgeton)
English, Michael
Jones, Rt. Hn. Sir Elwyn(W. Ham, S.)


Binns, John
Evans, Albert (Islington, S.W.)
Jones, J. Idwal (Wrexham)


Bishop, E. S.
Fernyhough, E.
Jones, T. W. (Merioneth)


Blackburn, F.
Fletcher, Sir Eric (Islington, E.)
Kelley, Richard


Blenkinsop, Arthur
Fletcher, Raymond (Iikeston)
Kenyon, Clifford


Boardman, H.
Floud, Bernard
Lawson, George


Boston, T. G.
Foley, Maurice
Ledger, Ron


Bowden, Rt. Hn. H. W. (Leics S.W.)
Foot, Michael (Ebbw Vale)
Lee, Rt. Hn. Frederick (Newton)


Boyden, James
Ford, Ben
Lever, Harold (Cheetham)


Braddock, Mrs. E. M.
Fraser, Rt. Hn. Tom (Hamilton)
Lever, L. M. (Ardwick)


Bradley, Tom
Freeson, Reginald
Loughlin, Charles


Bray, Dr. Jeremy
Galpern, Sir Myer
Mabon, Dr. J. Dickson


Broughton, Dr. A. D. D.
Garrett, W. E.
McBride, Neil


Brown, Hugh D. (Glasgow, Provan)
Garrow, A.
McCann, J.


Brown, R. W. (Shoreditch amp; Fbury)
George, Lady Megan Lloyd
MacDermot, Niall


Buchan, Norman (Renfrewshire, W.)
Gourlay, Harry
McGuire, Michael


Buchanan, Richard
Gregory, Arnold
McInnes, James


Butler, Herbert (Hackney, C.)
Grey, Charles
Mackenzie, Gregor (Rutherglen)


Callaghan, Rt. Hn. James
Griffiths, David (Rother Valley)
Mackie, John (Enfield, E.)


Carmichael, Neil
Griffiths, Will (M'chester, Exchange)
McLeavy, Frank


Carter-Jones, Lewis
Hamilton, James (Bothwell)
MacMillan, Malcolm


Coleman, Donald
Hamilton, William (West Fife)
Mahon, Peter (Preston, S.)


Conlan, Bernard
Hamling, William (Woolwich, W.)
Mahon, Simon (Bootle)


Corbet, Mrs. Freda
Hannan, William
Manuel, Archie


Craddock, George (Bradford, S.)
Harper, Joseph
Mapp, Charles


Crawshaw, Richard
Harrison, Walter (Wakefield)
Mason, Roy


Crosland, Rt. Hn. Anthony
Hattersley, Roy
Maxwell, Robert


Crossman, Rt. Hn. R. H. S.
Heffer, Eric S.
Mayhew, Christopher


Cullen, Mrs. Alice
Herbison, Rt. Hn. Margaret
Mellish, Robert


Dalyell, Tam
Hobden, Dennis (Brighton, K'town)
Mendelson, J. J.


Davies, G. Elfed (Rhondda, E.)
Holman, Percy
Miller, Dr. M. S.


Davies, Ifor (Gower)
Horner, John
Morris, Alfred (Wythenshawe)







Mulley, Rt.Hn. Frederick(SheffieldPk)
Rhodes, Geoffrey
Tomney, Frank


Murray, Albert
Richard, Ivor
Tuck, Raphael


Newens, Stan
Robertson, John (Paisley)
Varley, Eric G.


Norwood, Christopher
Rogers, George (Kensington, N.)
Wainwright, Edwin


O'Malley, Brian
Rose, Paul B.
Walden, Brian (All Saints)


Oram, Albert E. (E. Ham, S.)
Ross, Rt. Hn. William
Wallace, George


Orbach, Maurice
Sheldon, Robert
Watkins, Tudor


Page, Derek (King's Lynn)
Shinwell, Rt. Hn. E.
Weitzman, David


Paget, R. T.
Short,Rt.Hn.E.(N'c'tle-on-Tyne, C.)
Wells, William (Walsall, N.)


Palmer, Arthur
Silkin, John (Deptford)
Whitlock, William


Pannell, Rt. Hn. Charles
Silverman, Julius (Aston)
Wilkins, W. A.


Parker, John
Slater, Mrs. Harriet (Stoke, N.)
Williams, Clifford (Abertillery)


Parkin, B. T.
Small, William
Williams, Mrs. Shirley (Hitchin)


Pearson, Arthur (Pontypridd)
Snow, Julian
Willis, George (Edinburgh, E.)


Pentland, Norman
Soskice, Rt. Hn. Sir Frank
Wilson, William (Coventry, S.)


Popplewell, Ernest
Steele, Thomas (Dunbartonshire, W.)
Winterbottom, R. E.


Prentice, R. E.
Stones, William
Woodburn, Rt. Hn. A.


Price, J. T. (Westhoughton)
Strauss, Rt. Hn. G. R. (Vauxhall)
Woof, Robert


Pursey, Cmdr. Harry
Taylor, Bernard (Mansfield)
Wyatt, Woodrow


Randall, Harry
Thomas, George (Cardiff, W.)
Yates, Victor (Ladywood)


Rankin, John
Thomas, Iorwerth (Rhondda, W.)
Zilliacus, K.


Redhead, Edward
Thomson, George (Dundee, E.)



Rees, Merlyn
Thornton, Ernest
TELLERS FOR THE NOES:


Reynolds, G. W.
Tinn, James
Mr. Alan Fitch and




Mr. William Howie.

Mr. Turton: I beg to move, Amendment No. 70, in page 75, line 36, to leave out from "profits" to the end of line 41.
I move this Amendment in an exploratory fashion. This paragraph is framed in an extremely odd way and seems to have some awkward results, which I hope the Chancellor or the Chief Secretary will explain. It deals with the system of Commonwealth unilateral relief which is laid down in Section 348 of the Income Tax Act, 1952. The purpose of that was to provide for the exceptional cases, such as India and Pakistan, to which we could not give double taxation relief because of the weakness of their economies. Therefore, we are here dealing with a weakness in the provision for those to whom one would like to see the greatest leniency extended in this Corporation Tax.
It is true that, although it is purposely to deal with the abolition of unilateral taxation relief, particularly to India and Pakistan, it does not do that by this subsection. It merely gives them a warning that the Government wish to deprive them of that unilateral relief. It then takes what I suggest to the Chancellor is a most peculiar and obnoxious course of saying that from such date as Parliament may hereafter determine that unilateral relief may be taken away. I hope that I shall be corrected if I am wrong, but I presume that that means that by some subordinate legislation a relief which India and Pakistan and shareholders in India and Pakistan have hitherto enjoyed will be taken away.
9.15 p.m.
If we are to abolish a unilateral relief which has existed since 1952, the right way is to do it by a Finance Bill at some future date and not by subordinate legislation which presumably would be taken late at—I do not know whether by the affirmative procedure or by negative procedure. Surely that is the wrong way of approaching the matter. I appeal to the Government to reconsider the matter and, if necessary, to delete the paragraph from the Bill.
How much money is involved in this form of unilateral relief? It was an exceptional case for relief when it was first devised in 1952 to deal with the very peculiar problems of the poorer Commonwealth countries. As I said on the previous Amendment, if the Chancellor made such a concession on the eve of the Commonwealth Prime Ministers' conference on a matter which would appeal to the Commonwealth, showing his good will towards investment in the Commonwealth, it would be very well received.
I believe that he could make this concession with no great damage to his Bill. If later he felt that India and Pakistan and investors in India and Pakistan should no longer enjoy this relief, and if he were still Chancellor—which I think unlikely—he could introduce the necessary provision into another Finance Bill.

The Financial Secretary to the Treasury (Mr. Niall MacDermot): The Amendment seeks to retain permanently the unilaterial relief for underlying tax on investment in the Commonwealth. The


right hon. Member for Thirsk and Malton (Mr. Turton) asked me to explain the reasons for this provision and said that his Amendment to some extent was exploratory. I will take advantage of his offer and seek to explain the provisions to the Committee.
It must be looked at against the background of the general arrangements for relief against underlying tax. The Committee will remember from the last discussion that underlying tax is tax which is paid by an overseas company on its profits in the foreign country. At present, relief against underlying tax is granted in three ways. First, it can be done under double taxation agreements for any shareholder. That includes not only direct, trade investment but also portfolio investment, either by individuals or by companies. We have agreements of that kind with a number of countries, perhaps the most important being with America. Secondly, relief can be given unilaterally, and is given unilaterally, to any shareholder in a company resident in the Commonwealth. This again includes portfolio investment. Thirdly, it can be given either under a double taxation agreement or, if there is no double taxation agreement, then unilaterally for trade investment, direct investment, anywhere overseas; and for this purpose the rough-and-ready test which is written into the law for distinguishing what is trade investment is that if a United Kingdom company holds 25 per cent. of the voting power in the overseas company, it ranks as trade investment.
I would draw attention to two things in this connection. First, the investor in the overseas company is not put in a more favourable position than an investor in a United Kingdom company. Secondly, what we grant unilaterally within the Commonwealth is something that we are prepared to offer on a reciprocal basis to any other country—and other countries, of course, attach importance to this.
In his Budget speech, my right hon. Friend stated with regard to these classes of relief against underlying tax that in regard to the double taxation relief to any shareholder he proposed to seek to renegotiate these agreements, which will, in any event, in most cases be necessary as a result of our change over from an Income Tax to a Corporation Tax

system. It does not necessarily follow that as a result of these renegotiations there will be relief for portfolio investments under those agreements. With regard to the third class—if I can turn to that before dealing with the class with which the Amendment is concerned—that is to say, relief given either under double taxation relief agreements or unilaterally for trade investment, my right hon. Friend made it clear that it is proposed that that relief shall continue.
With regard to the unilateral relief, the relief to any shareholder in a company resident in the Commonwealth, he gave notice that it will be our intention to withdraw that relief at a later date. His reason for stating that it should be done at a later date is that it would be thought to be unfair to shareholders in companies resident in the Commonwealth to withdraw now and immediately something which we seek to obtain in other countries as a result of renegotiating the double taxation agreements.
It would, therefore, not be intended to withdraw this relief until we had seen what progress had been made in the renegotiation of the double taxation agreements. The withdrawal would be done only with the approval of this House. It would be done only by telling the House of the intention to do so, and the circumstances which it was thought justified it—

Mr. Turton: In what form would the approval be sought?

Mr. MacDermot: I should like to check on that so as to be sure I give the accurate answer. I think that I know the answer, but I want to be sure.
Perhaps while that information is being sought I can explain a little more the underlying reasons for this change, and anticipate the question I may be asked: what are the reasons for restricting in this way relief in respect of portfolio investment? We have been criticised for being undiscriminating in our tax measures as they apply to overseas investment, but this is a case in which we intend deliberately to discriminate. We intend to preserve the relief in respect of trade investment.
There are a number of reasons for that decision. Partly it is, of course, that the


underlying tax that is paid by a subsidiary company—and applying the 25 per cent. test as to what is a subsidiary—is, in a sense, tax paid within the company sector and to grant the relief does not conflict with the principle of Corporation Tax by separating company taxation from the individual tax paid by the shareholder. Also, I think that it has generally been agreed in this Committee that there is and can be a great difference in the effect on its returns to this country between trade investment overseas and portfolio investment. It is the trade investment which is likely to be more productive, and is designed to be productive of helping future trade between ourselves and the countries in which the investment is taking place.
Some portfolio investment may have an indirect result of that kind, but this is not its primary object. When we are seeking to put a brake on and to moderate overseas investment, this applies in particular to portfolio investment. This is in line also with the measures which my right hon. Friend announced in his Budget speech in connection with the switching of portfolio investment and provisions in connection with the switch market.
The second main reason is the one I referred to, that it would be wholly inconsistent with our new system if an investor in an overseas company could get a credit from overseas Corporation Tax when an investor in a United Kingdom company would not get a similar credit in respect of United Kingdom Corporation Tax. On the genuine trade investment the relief for the underlying tax continues. The trade investor in the overseas company would therefore be in the same position as a trade investor in a United Kingdom company. Complaints made in our previous debates in regard to lack of overspill would place a shareholder in the same position as the shareholder of a United Kingdom company.
In regard to the 25 per cent. test we have received representations in particular from some of the overseas mining companies in the Commonwealth that the 25 per cent.—which, I make clear, is not our invention but something we inherited from previous tax law—would bear too harshly on some of those companies operating within the Commonwealth. The reason is simple. There has been a

common practice within those companies where there is a high element of risk involved for several companies to get together and each to contribute rather less than 25 per cent. and to form a consortium. They set up a company abroad which probably one of the consortium will direct and manage. If we left the 25 per cent., none of them would get the advantage.
As a result of these representations, as hon. Members will have noticed, my right hon. Friend has put down Amendment No. 646 to Schedule 15, page 201, line 43, which reduces the 25 per cent. to 10 per cent. for the Commonwealth. We think this will afford real assistance and relief to one class of companies which were among those hardest hit.
I now have the answer to the question asked by the right hon. Member for Thirsk and Malton. In order to take the action which has been indicated an Act of Parliament would be needed before the unilateral relief for the Commonwealth could be withdrawn. I should like to look further into this advice I have been given because the provision in the Bill when it becomes law will be an Act of Parliament. I leave that as a provisional answer.

Mr. Turton: It is not an answer. This is not operative in the Act, it is declaratory and therefore it can have no operative effect. If the answer is that it requires another Act of Parliament, the point I made in my speech was good. This paragraph should be deleted, although no doubt the warning and very careful explanation which the hon. and learned Gentleman has given will be taken due note of by these companies enjoying unilateral relief. I also ask the hon. and learned Gentleman to give the other figures I asked for of the exact amount implicated in these proposals.

9.30 p.m.

Mr. MacDermot: I have been looking again at the wording. It is quite clear that no other procedure is provided in the Clause. It would need to be written into an Act of Parliament, either the Finance Bill or some other Measure and therefore it is clear that Parliamentary sanction would be required. I can see the advantages in giving a formal declaration of intention of the kind that at the moment is written into the Bill. There may be some technical reason, which I


shall look into further, why it should be written into the Bill. I will look further into the question which the right hon. Member for Thirsk and Malton raised, which is whether it is necessary to state this intention in the Bill or whether it would be sufficient to make this declaration of intention. As I say, I can see obvious advantages in making this declaration of intention in this very formal way so that people will have it brought to their attention in a way they are likely to act upon in deciding future policies.

Sir Derek Walker-Smith: Is the form of words used here a usual form of words? Are there any precedents for it to the hon. and Darned Gentleman's knowledge? It seems to me to be such an unusual form of words. Normally either Parliament enacts something, or enacts something in principle to be brought into effect by some Statutory Instrument or regulation. A mere declaration of this sort seems to me at least very unusual. Could the hon. and learned Gentleman illuminate us on that?

Mr. MacDermot: I agree with the right hon. and learned Gentleman. It is unusual, but then the situation with which it deals is unusual, namely, it is making a formal declaration of intent to alter the law at a future date. There are obviously good reasons for making the declaration in as formal a way as can be done at this stage, because clearly people who have to make business decisions and have to calculate what are likely to be the future effects of investment decisions they take should be given the maximum warning possible. But, for the reasons which I have indicated, we cannot now put, and it would not be right for us now to try to put, a date upon it, because we do not think it right to put investors in Commonwealth countries in a worse position relatively than investors in countries with which we now have double taxation agreements. Therefore, the removal of this concession will be done only when the appropriate stage is reached in the negotiation of these double taxation agreements.

Sir Harmar Nicholls: Surely it must be wrong to have a declaration of intention made in this way. It is hard to conceive that at a stage when we are dis-

cussing an Amendment in Committee on the Finance Bill a precedent of this importance could be set up in this rather casual way. I agree with my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith). It should be either settled in principle and carried through by some form of regulation later or it might be as well to withdraw it at this stage.

Mr. MacDermot: If the feeling of the Committee is that it will be sufficient and satisfactory for this to be given effect to by some form of delegated legislation and by an Order brought before the House I will convey those views to my right hon. Friend, but the view that we take—and I think that it would commend itself more to the Committee—is that this is a matter of importance which involves a change in the tax law relating to those countries which it is better to say will be brought forward and dealt with in a Finance Bill or in some other way by Act of Parliament.
It is unusual, but, of course, the circumstances are unusual in that this is part of a major change which we are making in our tax system. It appears to me, and I commend it to the Committee, desirable to make this declaration of intention in the most formal way possible so that no one at a later stage, when the change comes, can say, "I did not have fair warning of this. I made an investment in 1965 or 1966 thinking that the special Commonwealth relief was to continue". If people are given fair warning by Act of Parliament of an intention to remove the relief at a future date, they will not have the same ground for complaint This is the reason why it is right to write this into the Bill.

Mr. Michael Clark Hutchison: It seems to be an entirely new constitutional development to bring this into the middle of a Finance Bill. I must ask the Financial Secretary to look at it again and, perhaps, take the matter back for reconsideration, bringing something forward at a later stage, if necessary. We cannot fiddle about with the constitution in the middle of this Finance Bill.

Mr. MacDermot: We are not fiddling about, and I do not agree that any new constitutional principle is involved. We


are making perfectly clear what is to be done and how it is to be done; the only thing left open is the date. Normally, as hon. Members have said, a matter of this kind would be dealt with by delegated legislation, and it could be dealt with by delegated legislation subject to affirmative Resolution requiring that it be brought before the House. But what we are doing is to write in even greater protection than that for the shareholders concerned by saying that this is something which must be done by Act of Parliament. But it is equally important that by Act of Parliament we should now, at the earliest possible date, give a clear warning of what we intend to do and how we intend to do it, leaving open only the question of date.
If hon. Members wish, I shall readily undertake to look into the matter further, but I hope that they, too, will look into it further and, on reflection, consider whether it is, in fact, the most satisfactory way for the protection of the shareholders concerned to deal with it as we have proposed.
A word now about what the cost of the Amendment would be. It is estimated that about half of the yield which will result from the withdrawing of relief on underlying tax would be lost if the Amendment were accepted, that is, half a figure totalling £18 million at a 35 per cent. rate of Corporation Tax and £20 million at a 40 per cent. rate. In other words, about £9 million or £10 million would be lost directly.
Moreover, it is our view that, if the Amendment were accepted, the logic of the concession would be that it would have to be extended to other overseas countries than those to which we should grant it unilaterally in the Commonwealth. [HON. MEMBERS: "Why?"] For the reason I stated at the outset when I explained the present position. We do not at present grant any concession unilaterally within the Commonwealth which we are not prepared to offer to other countries reciprocally in a double taxation agreement.
As I have said, we intend to renegotiate these agreements so as not to perpetuate that relief in respect of portfolio investment. If we granted it unilaterally to the Commonwealth, we should be

under great pressure, and we do not feel that we should have proper ground upon which to resist it, to grant it again on a reciprocal basis under double taxation agreements. Therefore, we should be at risk of losing the whole of this yield by withdrawing the relief from underlying tax, which is something which, for the reasons I have indicated, we should find quite unacceptable. It would not only fail to apply the kind of brake we need on portfolio investment overseas but it would also undermine the whole basis of the Corporation Tax.

Sir D. Walker-Smith: I rise only to add a few sentences on the constitutional point on which I ventured to intervene earlier, that is in regard to the phrase in the Clause,
… as from such date as Parliament may hereafter determine …
As I indicated there are two methods whereby Parliament normally and constitutionally enacts its will. One, and the principal one, is by Act of Parliament, whether it be a Finance Act or any other Statute. The other is to enact a principle in Parliament and to leave the detailed application of that principle to a statutory instrument which in itself has the force of law and is a subordinate form of Statute.
Here we are confronted with something that is neither one nor the other. It is a declaration of intent proposed to be enshrined in an Act but not apparently to be given statutory force until some time hereafter. That, so far as I know at any rate—and the hon. and learned Gentleman has not corrected me—is a practice not normally known to our Statute law. It is a practice and would be a precedent which would be fraught with certain disadvantages because, once a thing like this is written into an Act it, of course, will have statutory effect and will have to be interpreted and applied if necessary in the courts of law. I can see considerable difficulty in interpreting and applying a statutory intention which might or might not be given legislative effect hereafter.
I think that the hon. and learned Gentleman rather overlooks the point that, constitutionally a Parliament cannot bind its successors; and, though he says what Parliament will enact he does not know—no one knows—whether Parliament at


that stage will be taking its recommendations from him or possibly from Ministers with other views. That is a practical reason why a declaratory form of intent such as this is not appropriate to our constitutional practice.
I said in my short intervention that there were these two methods normally in our constitutional practice of giving effect to the statutory intent of Parliament—Act of Parliament or subordinate legislation in the form of Statutory Instrument. The hon. and learned Gentleman inferred from this that we might be suggesting that the latter form was appropriate here. That, of course, I do not think that anyone on this side would wish to see. It is a practice which, unfortunately, in the complications of modern society, is inevitable in a good deal of our legislation but it should be kept to a minimum and in particular excluded as far as possible from the range and ambit of our tax laws and Finance Acts. Therefore it is clear that the Chancellor in this form of words is really proposing something rather novel in our constitutional practice, which introduces a new form of words into our tax law and may be fraught with certain difficulties.
I hope that I do not do the hon. and learned Gentleman any injustice—he knows that I would not wish to do so—if I say that I got the impression that perhaps until we had this short discussion he and his fellow Ministers may not have been entirely aware of the effect of what they were doing here and the extent to which it is a deviation from normal constitutional practice and precedent. I hope, therefore, that, having regard to the length and complexity of this Bill, he will not feel that it in any way reflects upon his Ministerial competence if he undertakes to look at it again and not have any stubborn pride of authorship in the exact wording of this Clause.

Mr. MacDermot: The right hon. and learned Gentleman will have heard that I gave such an undertaking.

9.45 p.m.

Mr. Harold Lever: It appears that we have stumbled on a constitutional crisis by accident, as it were. It seems rather extraordinary that, without anybody else noticing it and by reason of a casual aside, a constitutional crisis of fundamental importance has been discovered.
I must say that I admired the contribution of the right hon. and learned Member for Hertfordshire, East (Sir D. Walker-Smith), which had his usual lucidity. I admired even more that he managed to keep his face straight throughout the argument. He said that the courts would have great difficulty in interpreting this piece of surplusage. The answer is that the courts could not have the smallest difficulty and that a preparatory schoolboy could not have the smallest difficulty in interpreting the legal consequences of a declaration as inocuous as this and one by way of warning which happens to be embodied in a Statute dealing with tax. The idea that this produces some extraordinary mystifying and terrifying consequence to our fiscal structure is somewhat exaggerated.
I will content myself by saying that while this is a useful way of giving a warning, and I prefer it to the way in which warnings have been given in the past, and if warnings are to be given, this way gives them a certain dignity, I am not in favour of warnings being given in this way. The late and little lamented Government were apt to give warnings from time to time. There are two which come to my mind. One was on a Finance Bill, when they said that they would retrospect if necessary if avoidance of their provisions took place. That was a warning which they did not honour. The other led to the Burmah Oil Company affair and was a warning by letter which saddled the unfortunate Labour Government with the malign intentions of the Conservative Government.

The Chairman: We are getting a little away from the Amendment.

Mr. Lever: I was about to complete the point. The point I was seeking to make was simply that the Conservative Government did not produce a good example of how a warning should be given. If this is a novel way, it is all the more welcome in that that differentiates the warning from those given by the outgoing Government.

Sir Harmar Nicholls: It is all very well for the hon. Member for Manchester, Cheetham (Mr. Harold Lever) during a period of repentance to throw his protective cloak around the Financial Secretary, but he was in the Committee and


heard the Financial Secretary say that he would consider putting this matter right by affirmative Resolution.

Mr. Harold Lever: What he said was that if the Committee really wanted it he would represent to his right hon. Friend that it was the wish of the Committee.

Sir Harmar Nicholls: No. I think that he went rather further than that. The hon. Gentleman is three-quarters of the way right, but the Financial Secretary certainly gave the impression to the Committee that he thought that this was the sort of thing which might be done if the Committee wanted it. When we are dealing with a Finance Bill and the taxation system of the country, that is something which the hon. Gentleman, if he were not feeling so repentant, would agree could not normally be contemplated.
I have every sympathy with the Financial Secretary, but my right hon. Friend the Member for Thisk and Malton (Mr. Turton) did not necessarily discover this matter by accident. The object of the Committee stage is to probe this sort of detail and find this sort of flaw. My right hon. Friend has been in the House of Commons for some year and has taken a keen and active interest and must have known that the sort of Amendment which we have moved would be likely to discover this sort of weakness. I would have thought that it was in the interests of good law that when a weakness has been disclosed there should be a clearer offer for the matter to be reconsidered than the Financial Secretary has given so far.
What saddened me about the Financial Secretary's reply was that he did not see that there was a special claim from the Commonwealth. He rather suggested that because of obligations which might have accrued to other nations he could not feel the conviction that he could argue a special case for the Commonwealth in considering this matter. If there were the strength of purpose which was evident in the speeches of the hon. Gentleman the Member for Cheetham and his friends before the election in their new support for the Commonwealth, it would be recognised that there was a special case for separating the two. If those on the Treasury Bench would look at the posi-

tion as it would affect India and Pakistan, they would see that there are very good reasons for trying hard to make commonwealth a special case. I was sorry that the Financial Secretary did not respond to the appeal of my right hon. Friend the Member for Thirsk and Malton.
We have the Commonwealth Conference meeting shortly, and there are many problems and difficulties. It could well be that if it succeeds we shall maintain the leadership of this great unit. On the other hand, if some of the problems which are hovering round have precedence, there could be a breakdown which could be dangerous. I believe that the great appeal made by my right hon. Friend the Member for Thirsk and Malton to take advantage of this tactical minute while the Commonwealth Prime Ministers are here would be worth being borne in mind. I hope we shall consider not only the constitutional issues put forward by my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith), but the greater issue in relation to our standing in the world as leader of a Commonwealth group.

Mr. Peter Emery: The whole Committee, including the Government Front Bench, will be particularly grateful to my right hon. Friend the Member for Thirsk and Malton (Mr. Turton) for moving this Amendment because there can be little doubt in the mind of anyone who has sat through the whole of the debate today that the Government are not absolutely certain of the final operation and the way this provision will be brought into being. What we are considering here is unilateral relief in underlying tax for Commonwealth countries. The point that needs emphasising when this matter is considered is the specific effect particularly in Pakistan and India, and of course the overseas mining interests.
This point, also emphasised by my hon. Friend the Member for Peterborough (Sir Harmar Nicholls), concerning the Commonwealth is something which many of us feel strongly about. Whilst at the same time accepting the point, made fairly reasonably, I think, by the Financial Secretary about the difficulties that this might involve with other taxation agreements, I suggest that it would be quite wrong of him to try to suggest


to the Committee that every double taxation agreement is the same. I think his argument falls a little in strength when he tries to suggest that one has to have the same unilateral offer for everyone. We take the point about agreements as far as portfolio investments are concerned as opposed to the investments in trade. This is a fair point and I am certain that my right hon. Friend the Member for Thirsk and Malton would feel that it was of the greatest importance that the need to ensure that the investment, as far as trade investment was concerned, was guaranteed.
There is only one other feature which I found spoilt the offer of the Financial Secretary to look again at this. I refer to his dogmatic repetition, which we have had from one Treasury Minister after another, that investment overseas must without exception be treated in exactly the same way as investment at home. We on this side of the Committee do not necessarily accept that. When it is said from the other side of the Committee, we must make quite certain that we on this side make our position quite clear. It is quite plain that we believe that at times there should be the desire to encourage investment in certain places in the world and that that incentive should be given in a manner whereby overseas investments may be treated differently to investments at home.
I fully agree with the speech of my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith): I will not attempt to deal with the constitutional points—my right hon. and learned Friend can at all times do that much more adequately than I—but it seems to me to be strange that if in future we are to have clear warnings, they must be spelt out in the Finance Bill. Heaven help Parliaments in future if every clear warning has to be dealt with by a paragraph in the Finance Bill. I take the point made by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) that he likes that kind of unilateral declaration in the Finance Bill, but it is nonsense to suggest that it is imperative that if this action should be taken or is desired by a Government to be taken, it has to be announced in the Finance Bill.
I come, therefore, to the last point, which brought from the Financial Secretary the forthright guarantee to look at the matter again, that when we come down to it the Government do not really know how they will carry this out. I do not want to make a point of that. Anybody could be as uncertain as the hon. and learned Gentleman on a Bill as long and as complex and with as many Amendments as this one. Therefore, I urge my right hon. Friend the Member for Thirsk and Malton to accept the definite guarantee given by the Treasury Minister. We can return to this matter on Report.

Mr. Turton: I understand that the Financial Secretary has given a clear undertaking that the inclusion of the paragraph will be considered before Report and that there will be another opportunity for us to reconsider the matter. On that assurance, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Peter Emery: I beg to move Amendment No. 604, in page 76, line 6, to leave out subsection (3).

The Chairman: With this Amendment, I propose that we take also the following Amendments:
Amendment No. 540, in line 7, at end insert "after 6th April 1976".
Amendment No. 533, in line 8, after "except", insert:
in respect of a company or a subsidiary company which is carrying on a trade in the Commonwealth overseas and in respect of other companies".
Amendment No. 541, in line 10, leave out "1966–67 "and insert" 1976–77".
Amendment No. 542, in line 15, at end add:
as if references to 1965–66 and 1966–67 were references to 1975–76 and 1976–77 respectively:
Provided that the reference to the years 1975–76 and 1976–77 in this subsection shall only apply to overseas trade corporations the income of which is entirely derived from operations outside the United Kingdom".
The hon. Member for Middleton and Prestwich (Sir J. Barlow) has asked that I might allow a Division on Amendment No. 540. I propose to accede to this request.

Mr. Emery: Thank you, Dr. King. This brings the Committee to consider in


full the question of overseas trading companies. We have seen references in debates on other subjects to O.T.C.s, but this is the one specific place in the Finance Bill where the Committee has to decide whether O.T.C.s should continue or should be done away with.
It is of interest to consider one or two statements concerning the background of overseas trading corporations. In April 1957, when overseas trading corporations were first considered and were brought within the Budget, there were two references to which I wish to draw the Committee's attention. The first was by my right hon. Friend the Member for Monmouth (Mr. Thorneycroft) who was then Chancellor of the Exchequer, who said:
With 50 million people living here upon a small island, and dependent on external trade and confidence in sterling, it is this which is always uppermost in the mind of any Chancellor.
My right hon. Friend went on to say that
during the second half of the year, countries outside the sterling area reduced their holdings of sterling by £84 million, and that there were other large adverse capital movements. It was these factors which were responsible for most of the strain on our reserves."—[OFFICIAL REPORT, 9th April, 1957; Vol. 568, c. 965–6.]
10.0 p.m.
I point this out particularly to make the Committee realise that when legislation dealing with O.T.C.s was brought in there were problems of the same sort—not quite as acute, I agree—as the Government are having to deal with at the moment, and in which abolition of overseas trading corporations might possibly assist, in dealing with the balance of payments.
What really is the background to the provision for O.T.C.s? It comes, as I am certain I only remind the Committee, in the Final Report of the Royal Commission on the Taxation of Profits and Income. There are in this three points I should like to draw to the Committee's attention. It was the recommendation of the Royal Commission that:
We are now in a position to state what action we recommend in this difficult matter.
That is, of overseas investments.
We think that there should be a change in the present system that will make it possible to allow a tax exemption in respect of some overseas profits.

That, I think, is quite clear, and it was to deal with that that we had the specific recommendations made in the Budget of my right hon. Friend the Member for Monmouth.
It is the essential points behind this which must be considered and which I should like to draw to the attention of the Committee. The Royal Commission said it wished to state quite plainly the essential points of its recommendation, and it said:
We think that the present distinction between resident and non-resident trading companies is an unfortunate one in so far as it is made to depend on the site at which central management and control are exercised. It is not in the true interests of this country that overseas business should be discouraged from having its central management and control here, a tax liability which rests wholly on that distinction ought not to be continued.
That, I think, is quite clear. Do the Government now deny that it is in the interests of this country to encourage overseas businesses to have their central control and management in the United Kingdom? In other words, are they getting away from that specific recommendation? If that is so—for myself I cannot think it can be the case—I really would like to know where the situation has altered so much since 1957 that they can go against the views of the Royal Commission.
The second recommendation was:
… if central management and control are to be exercised here without tax liability necessarily resulting, it is very important that the conditions should be strictly defined within which any such exemption is to be permitted. It follows from this that, apart from the exercise of management and control, only such activities within the United Kingdom should be within the exemption as the economic interests of this country are seen to demand.
This is a matter where there could be misuse, and what I would ask the Financial Secretary is, which companies have acted in a way which might be considered to be an abuse and which necessitates the alteration? Are there examples which he can quote? I shall myself deal with one specific matter. I would very much like to know what are the reasons which justify the Government in this instance also, and in departing from the majority view of the Royal Commission.
The third recommendation was:
Any scheme that is put into operation on these lines touches economic issues of


great importance. … Such a scheme can only be justified in the long run by its contributon towards success. … It is by this that it will have to be judged rather than by theoretical arguments of equity.
I suggest to the Financial Secretary that there have been definite economic advantages. I do not want to over-play my hand. These are not as large as some of the advocates of the legislation dealing with overseas trade corporations originally suggested, but I believe that there have been direct advantages. These are things which the Committee understands, and if they are to be done away with, it is only right and proper that the Financial Secretary should tell us how the Government are going to provide for these advantages in the future.
It should be clearly stated that during the debates at that time, which were led mainly by Mr. Gordon Walker, it was suggested that if we were not to have the O.T.C. legislation, this should be met by direct grant from the Government. If it is to be by direct grant, this does not mean that we will have any saving for the balance of payments. If the recommendations made by Mr. Gordon Walker are to be followed through, the Committee has a right to be told.

Sir Harmar Nicholls: My hon. Friend is taking unfair advantage of Mr. Gordon Walker by making it public that he was the sponsor.

Mr. Emery: At no time would I wish to embarrass anybody, but, as my hon. Friend will realise, it is difficult to give Mr. Gordon Walker notice that I was going to raise the matter.
It is true that the minority Report of he Royal Commission did not exclusively back up this specific recommendation. Let us be fair. I am not trying to mislead the Committee on this matter. The minority Report, signed by George Woodcock, H. L. Bullock, and Nicholas Kaldor, said in paragraph 179:
We agree with the view that the variety of practice of the tax treatment of the so-called 'overseas profits' in different countries, described by the Majority, along with the growing practice of export subsidisation in its manifold forms, puts this country at a disadvantage in its overseas trading activities. We believe however that the remedy should be sought in international efforts to secure the suppression of such practices, and the adoption of conventions ensuring uniformity of treatment, rather than in their imitation.

I have read the whole paragraph so that I cannot be accused of selecting odd pieces which are beneficial to my case.
Have these practices been suppressed since 1957? Obviously the answer is "No". Is there a greater uniformity of treatment? The answer to that is "Yes, because of the 1957 legislation bringing in overseas development companies". It is therefore fairly obvious that the Committee needs to have put before it a much better case than we have had so far for the abolition of the O.T.C. legislation.
The Financial Secretary may recall that on 10th May he said:
The Corporation Tax will act as a brake, but will not prevent desirable overseas investment."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 57.]
I remind him of that because it seems that some of the most desirable overseas investment is that carried out by the overseas trade corporations. It makes nonsense of what the hon. and learned Gentleman has said if he now wants to do away with this form of overseas investment which, in the view of many hon. Members on this side of the Committee, is one of the most desirable forms of overseas investment.
We should realise that it is not only we in this Committee who feel strongly about this matter. A document which the National Association of British Manufacturers has sent to the Chancellor of the Exchequer says:
The Association regrets the abolition of O.T.C. status; this may well drive companies to seek to transfer control abroad and it may become increasingly difficult for the Treasury to resist this. In addition, it appears that the maximum rate of relief in respect of income from abroad will be the corporation tax rate and any excess overseas tax may not be applied in reduction of the tax payable on dividends.
We must point out to the Treasury that doing away with O.T.C.s is bound to mean that the value of the shares of these companies is likely to fall. In so doing, because of the taxation position which the Government are now bringing in by the Bill we are arriving at a position in which these overseas trade corporations will be much more likely to be taken over by overseas investment than retained by British investors.
I cannot believe that that is the desire of the Treasury, or that it has thought fully enough about this aspect of the matter. I said that I thought


it was important that the Financial Secretary should tell us whether he saw any direct abuses that required the abolition of this legislation. In all fairness, I must point out that there have been accusations that at least one or two companies have been able, by the regulations, to average their foreign tax paid. An obvious example is India, with a 70 per cent. taxation position, in conjunction with, say, Hong Kong, with 12½ per cent. They have been able to average this tax. Putting an average on the same amount of investment will obviously work out at a 41 per cent. tax payment. If we had a 50 per cent. tax position in the United Kingdom it would mean that full relief from taxation could be obtained on both lots of investment. It may be that this was not the intention for O.T.C.s when they were originally brought in.
Secondly, here has been a certain difficulty in the definition of distributions. There has been some doubt and criticism about this. But both these could be dealt with quite easily by regulation. I do not believe that there is any sense in doing away with the whole O.T.C. procedure for overseas investment in order to meet either of those abuses. It is, therefore, imperative that the Government should be able to make out a case which clearly meets the points originally set out in the Royal Commission on the Taxation of Profits and Income.
I want to say four more things. [Interruption.] I can say more, but I am trying to be reasonable. I am trying to overcome, without objection, the running conversation which some hon. Members opposite seem to want to carry on. It is sometimes more polite to have these conversations outside the Chamber, but if hon. Gentlemen wish to have them here it does not upset us, because those of us who are really serious about the Bill are determined not to deal with foolish political argument but to try to present a fair and proper case on the Amendments. This is what the country wants and this is what the Committee wants. It is certainly what I am trying to do.
10.15 p.m.
It seems to me that we have to consider, in overseas trading corporations, the position of non-resident shareholders,

where companies desire to operate with headquarters in the United Kingdom. O.T.C. procedure is the one procedure which allows for this point to be met. If this is done away with, I do not see how the Government will be able to find any way of encouraging overseas shareholders—perhaps in a majority—to keep the operating company headquarters in the United Kingdom. Therefore, there must be that benefit, which has at no time been considered by the Chancellor of the Exchequer.
The second thing which I would say to the Financial Secretary in concluding is that this is an attack on some of the smaller companies. This is important, because, initially, the O.T.C. procedure benefited a considerable number of larger companies operating overseas. But with the advent of nationalism in these countries on their independence, it has now become much more evident that these companies can operate more efficiently by not remaining as O.T.C.s but changing their operation to subsidiaries partially owned, partially financed, and partially managed by the countries in which they are operating. This is specifically so with the larger companies, whether Shell or the mining companies. This is the pattern.
Therefore, the people who have not done this are much more likely to be the smaller companies operating in the O.T.C. ambit. Again, it seems that the O.T.C. procedure is needed specifically for investment in the least developed of the developing countries. This is important. This is the one way in which we can try to encourage into the least developed countries capital and capital investment. We know that there are difficulties. We have had facts from the hon. Member for Birkenhead (Mr. Dell) to show that less and less capital is going into these areas, but this is one of the ways in which the O.T.C. procedure would allow that to continue.
I am in no way trying to exaggerate the case. Only a small amount of money is involved. After all, it was quite obvious from the Financial Statement of 1965–66, page 15, that the estimated effect of the abolition of O.T.C.s in a full year will be a benefit of £2 million in taxation. This, therefore, is peanuts in the light of this Budget. We should hear in mind


this small amount and the fact that O.T.C.s were brought in in order to ensure that we could give benefits to investment in these areas as well as the fact that all that will be gained in taxation is £2 million.
One has to set against this the benefits of our investment. I have not dealt with exports which may accrue from this sort of investment. We have had that argument time and time again and I do not want to weary the Committee. I have tried to present the exact points which bear on O.T.C.s and which have not been raised before. There are three other Amendments associated with this one. I have not tried to deal with them. I hope that the hon. Members who are sponsoring these Amendments will be able to make their own points, and I do not intend to duplicate them in what I have said.
Therefore, purely on our own Amendment, I would urge the Government carefully to consider accepting our recommendation that what it gains in savings of the balance of payments or increasing the taxation by doing away with O.T.C.s, it certainly loses a lot of respect which we have in the countries where O.T.C.s are doing good. At this time, with the Commonwealth Prime Ministers' Conference about to start, I should have thought that it would have been a very small concession for the Chancellor of the Exchequer to have announced that he intends that the O.T.C. procedure should continue.

Sir John Barlow: I have had an interest in this subject for very many years. I remember putting down Amendments to Finance Bills about ten or eleven years ago to try to secure what was promised for O.T.C. companies in 1956 and became law in 1957. As the Committee knows, I have a personal interest in several O.T.C. companies. That gives me the advantage of speaking with a certain amount of knowledge.
The abuses which we have seen of the O.T.C. company scheme have been very small, and it is taking a sledge hammer to crack a nut to abolish the whole scheme in order to remedy the few shortcomings which have existed. The U.T.C. scheme has been of immense advantage both to this country and to

the overseas companies in which they have operated. Had it not been for the overseas trading corporation tax concession, many companies would have left London and would have gone to the countries in which they operate. I am glad to say that they are still here.
During the last few years, with the increase in the feeling of nationalism, developing countries have attached a considerable amount of prestige to having control in their own capitals of companies operating in their territory. We see it in the Far East and in Africa. There is continual pressure to draw the registration of companies from London to the country in which they operate.
I am convinced that in many cases it is far better that the registration should remain in London. These companies—I believe there are about 800 of them—have been built up in many cases over a very long period, and they have been very successfully run. There is no doubt that there is a tendency for them to emigrate from this country, and that may be a good thing, but it would be a great drawback if they were forced out through lack of reasonable taxation treatment in this country.
The O.T.C. companies were largely brought into this country because locally controlled and run companies abroad could frequently pay very much higher dividends and less tax than companies controlled from this country. Not only did the local shareholders benefit substantially but in many cases foreign shareholders could invest in those countries far more lucratively than they could invest through London registered companies.
The suggestion that the tax concession for these companies should be abolished is short-sighted. Originally it was suggested that it should be abolished over a period of five years. That has been extended slightly, but the period is still quite insufficient. If the Government will adopt the Amendment which has been moved, I shall be delighted not to press my Amendments; otherwise I shall be forced to persist with them. I believe that since the Budget proposal to abolish overseas trade corporations, many and strong representations have come from the countries that will be vitally involved.
A number of countries have a considerable interest in this matter. Ceylon exists largely by its exports of tea and rubber. They amount to about 78 per cent. of her total exports. If O.T.C.s status is abolished, either the dividends that are allowed to be sent to this country will be diminished or the upkeep of the gardens will have to suffer. They cannot continue as they have done until recently.
India is the biggest tea growing country in the world. Each year it produces about 760 million lb. of tea, of which 500 million lb. are exported. The value of that export is about £99 million, and it is about one-fifth of the total of India's exports. We probably all know of the difficulties of development, and of raising the standard of living there. The value of the tea gardens has been largely built up by the ploughing back of profits in the form of modernisation and extension during the last 30 or 40 years. The abolition of O.T.C.s will make it very much more difficult for these gardens to continue at their present high standard.
The rubber estates in Malaysia were largely established just before and after the First World War by companies registered in London. The total amount of capital put up in those early days was in the region of £70 million. Some of that investment was lost, but I understand that since 1930 no new money has been sent out there for the development of rubber—or, for that matter, of tin. Because of the ploughing back of profits, Malaysia has some of the best rubber estates in the world. The production on the European estates is about twice as great as that of the native estates—which, incidentally, get a very great deal of help by the example of and the experiments on the European estates.
The amount of profits returned from Malaysia is estimated at about £15 million a year, and another £15 million is estimated to come from exports, insurance, shipping and invisible exports. It would therefore appear that from an original investment of about £70 million we get an annual return of about £30 million which is very valuable indeed. If the O.T.C.s are abolished, the tax there accepted, and the whole of the rest of the profits declared as dividends, it will mean

taxation amounting to about 65 per cent. here compared with 40 per cent. in Malaysia, so that there will obviously be a very strong urge to move the control of the companies from London to Malaysia.
10.30 p.m.
Already the value of many rubber shares has diminished substantially since the announcement was made—in some cases up to about one-third. There are indications that there are syndicates being formed in Malaysia to buy up and take over London-registered rubber companies; and they will get them at far below the real market price merely because of this taxation proposal of the Government.

Mr. MacDermot: I follow what the hon. Gentleman is saying about the threat of take-over, and I hope to deal with that later. He was saying earlier that there would be a move to emigrate. Can he show how it would be to the tax advantage of the shareholders of an O.T.C. to emigrate from here to Malaysia?

Sir J. Barlow: The Chinese in Malaysia could afford to pay far more for the estates and get a far higher yield than the British shareholder, and for that reason the Malays would get control. We have seen a certain amount of that in the past.

Mr. MacDermot: The hon. Gentleman is dealing with the take-over point. I was asking him to go back to his point about emigrating. He suggested that the abolition of O.T.C. status would provide an incentive for emigration. I do not understand why it would be to the advantage of the shareholders of an existing O.T.C. to emigrate to Malaysia.

Sir J. Barlow: It would not be to the advantage of British shareholders to emigrate, or for the company to emigrate, but it would be to the advantage of local capital in Malaysia to buy these estates at cut-throat prices. I know of certain cases of mining companies in which more than 50 per cent. of the shareholding is already held abroad, and great pressure would be brought to bear if and when O.T.C. status were abolished. If over 50 per cent. is held abroad already, it is comparatively easy for those


Commonwealth overseas shareholders to force the removal of the central office; and there is every indication that that wit' come about before very long. Either dividends of rubber companies would have to be reduced by about one-third, or the very necessary replanting of rubber would have to be cut to meet the situation if O.T.C. status is abolished.

Mr. Julian Ridsdale: Is my hon. Friend aware that the Tunku Abdul Rahman, on television tonight, in a programme in which the Prime Minister appeared, objected in very much the same terms as my hon. Friend is now doing, and the Prime Minister said that these Amendments would meet some of the objections which the Tunku had made?

Sir J. Barlow: I am very interested to hear that. This country owes a great debt to Malaysia and the rubber industry. In the six years immediately after the war, when American dollars were so difficult to secure, Malaysian rubber produced about £80 million worth of American dollars annually. That was more than all the. exports from this country to the United States at that time.
Owing to its prosperity in the past, Malaysia has very wisely built up large credit balances. I believe that they are in the region of £400 million in sterling in London, and the net figure is in the region of £200 million. If Malaysia has that herself, other countries probably have substantial balances as well. If they dislike intensely the abolition of O.T.C. status, it is probable that they will make strong representations, to say the least. Anyone who knows about banking would be reluctant to turn away loyal depositors at a time such as this, but I will not

develop this theme. Have representations on these lines come from Malaysia and other countries?
I think I am right in saying that when the Chancellor spoke on Second Reading he indicated that the outflow of money, largely through O.T.C.s, had increased phenomenally in the last few years. I have with me some figures of certain mining companies which invested large sums many years ago. They show the outflow in the last 10 years. Of three companies, the outflow in the first in the last 10 years was nil and the inflow £20 million, the outflow in the second was £5 million and the income £30 million and the outflow in the third was £58 million and the inflow £87 million.
Mining, tea and rubber are all showing the fruits of investments made long ago. At the same time, money has been ploughed back, profits have been developed, reasonable dividends have been paid for very many years and great assistance has been given to the countries which we are trying to help to develop. In recent years we were told time and again by hon. Gentlemen opposite, when they were in Opposition, that we were not doing nearly enough to help the developing countries. In the cases I have described, we have for years been helping them and ourselves. It has been to our mutual advantage. Now the Government, with one swing of the hand, are trying to spoil all this, if not stop it.
I hope that the Government will think again on this matter. Their action will create immense ill feeling among overseas countries. It will not only destroy the golden eggs but sell the goose for a mess of pottage.

Mr. John Harvey: It is reasonable to contend that the Government have been prejudiced, almost from the beginning, against the whole concept of the O.T.C. I suppose that the Bill is merely a logical sequel to the views which hon. Gentlemen opposite have held all along.
It is relevant that when Mr. Gordon Walker led for the then Opposition, in May, 1957, he referred to the O.T.C.s as representing the most controversial aspect of that year's Finance Bill. Nevertheless, he said:
We think that there is a case for helping United Kingdom-based companies that operate overseas. This practice has spread very far, and is widespread in other countries with which our companies are competing".—[OFFICIAL REPORT, 7th May 1957; Vol. 569, c. 825–6.]
Despite what was said on that occasion we now find, as my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) said, that all the good work of the past could mean nothing, with perhaps many companies deciding to move from this to other countries. This could all happen because of two separate aspects of the Bill—the abolition of O.T.C.s and the application of the Corporation Tax with the narrowing of the difference, from the point of view of company taxation, between the taxation rates here and the rates in other countries. The advantages may be so narrowed that the benefit of the O.T.C. arrangement may in many cases be lost.
Earlier today, the Chancellor suggested that the Corporation Tax would not be levied in this country at as high a rate as in some other countries, ignoring the fact that personal taxation is so much higher here. Because of the level of taxation in this country, there will still be the danger, whether one abolishes the O.T.C. arrangement or not, that control of companies from London may well be subject to transfers and take-over bids which will in themselves cost this country quite a bit of money.
I suspect that the Chancellor does not intend to be conciliatory over this Amendment. Usually, the concessions, if one can give that name to taking away less than one had first intended to take, are announced over the weekend; and this is not among them. My hon.

Friend has tried to persuade the Financial Secretary that this sort of action causes a great deal of disquiet in many overseas countries and developing countries. It gives them grave cause to doubt our long-term interest in their future. Yet there is no division of opinion in the Committee in wanting to take a genuine long-term interest in their future. If we can only have an assurance from the Financial Secretary that he will look at this matter again between now and Report, that will be something.
I put three points to the hon. and learned Gentleman for his serious consideration. First, the Bill makes no provision to deal with an O.T.C. which may have accumulated losses. It is reasonable to ask that consideration be given to the position of O.T.C.s which have not thus far been able to get off the ground. The initial years are often the most difficult, and for something to be cut off in this way calls for a quid pro quo from the Government.
Second, we have already, in another context, arranged to afford a tailing-off period of seven years in order that benefits under a former order of things may be continued while companies work out their salvations under the new régime. Is it not possible to have a similar tailing-off period of seven years for overseas trading corporations? It would be of great help to those which have only just started developing an industry in one country or another. One could accept in return that no new O.T.C. undertaking should be encouraged in any such tailing-off period.
Third, if the O.T.C. provisions are to be cancelled, the Chancellor ought to consider some relaxation of the provisions of Section 468 of the Income Tax Act, 1952, which at present requires a United Kingdom company which wishes to set up a company abroad to obtain permission from the Treasury. In equity, if the O.T.C. arrangement is to be dismantled, the Chancellor should give careful thought to these three suggestions.

10.45 p.m.

Mr. Turton: As this Amendment is being taken with Amendment 533, I would remind the Committee that this subsection is the "weed killer" subsection to which my right hon. Friend the Member for Birmingham, Handsworth


(Sir E. Boyle) alluded earlier. This is the subsection which prompted Sir Jock Campbell to say that in his view this would have deleterious effect generally on overseas investment in the Commonwealth and would cause a number of companies to hand over and get rid of their interests to foreign concerns. That is why I would have thought the whole Committee would be anxious to scrutinise very carefully this proposal to abolish overseas trading corporations.
If the Government are determined to abolish overseas trade corporations, then the purpose of the Amendment is to exempt overseas trade corporations in the Commonwealth. My hon. Friends and I take the view that we have a rôle to play in the developing countries of the Commonwealth and that the overseas trade corporations are the best way of fulfilling that rôle.
I gather from the intervention of the Chancellor earlier that Sir Jock Campbell had been rather worried because his comments in his annual report had shown that he was no longer voting Labour.

Mr. MacDermot: The right hon. Gentleman misunderstands. My right hon. Friend's complaint was that the Press reported fully his chairman's speech which had been published before the recent concessions were announced. At that time Sir Jock Campbell made a further statement welcoming these concessions and he issued a Press hand-out which, with the exception of one national newspaper, the Press failed to give any publicity to and thereby gave an entirely false impression.

Mr. Turton: This may apply to the "weed killer". He said that the effect of this provision was to encourage British companies to be got rid of to foreign interests, which is the very point which my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) was making. I can quite understand the protestations of Sir Jock Campbell that he is still going to vote Labour. Those of us who remember his article in the Observer "Why I am Voting Labour" started:
My younger son asked me why on earth I was going to vote Labour about a week be fore the 'Observer' asked me to write this article.

The Temporary Chairman (Sir Harry Legge-Bourke): I would ask the right hon. Gentleman to remember that we are relating the discussion to whether or not subsection (3) should stand part of the Clause. I do not think Sir Jock Campbell is in the Clause.

Mr. Turton: With respect, Sir Harry, that is the whole point. Sir Jock Campbell's remarks were directed to the dangerous effect this subsection will have on overseas trading corporations and companies working and trading overseas like Booker Brothers.

The Temporary Chairman: I would accept, of course, from the right hon. Gentleman that Sir Jock Campbell may have made some remarks relevant to the Clause. As long as he keeps his comments to that all will be well.

Mr. Turton: Sir Jock Campbell wrote:
'Everybody at school,' he added, 'thinks you're barmy!'
That, I think, explains the intervention of my right hon. Friend the Member for Handsworth, and also the intervention of the Chancellor. We will leave it there.
Here the Government are making a direct attack on Commonwealth investment and on companies trading in the Commonwealth. I believe that a great deal of our influence in the world has arisen from the work of these companies which have been enjoying the benefits of the overseas trade corporations.
If that benefit is to he withdrawn by the Government, I challenge them either to bring in comparable benefits to encourage development by British companies in the developing Commonwealth or to say that they are definitely against Commonwealth Development, which is something quite contrary to everything they said when they were in opposition.
I see no justification for this. As I have said before, I can see a justification for this Committee taking great care that we do not waste our investment capacity at the present time in view of the balance of payments, but I suggest that this subsection is damaging our balance of payments position and that one of the reasons for the bad trade figures announced yesterday is that this Bill obviously is intended to damage Britain's


role in investing overseas and has caused a lack of confidence in Britain throughout the world.

Mr. Harold Lever: It is reassuring that the junior school remains loyal to Conservative principles however much their influenced has diminished in more adult circles. I do not rise to deal with the merits of the subsection. I have the wrong reflexes, Sir Harry. I am rather in favour of leaving the maximum of tax reliefs and even considering increasing them but it is not always possible to do that. I rise to deal with one short point worth considering.
Some companies brought their business to this country because of the overseas trading corporation provisions. I want to ask my hon. and learned Friend to undertake that, in the case of companies which came here on the faith that they could enjoy the privileges given overseas trading corporations, no obstacle will be placed in the way of their returning to a foreign domicile of their choice provided they can satisfy the Revenue or some judicial department of the Revenue that they came here in good faith in order to take advantage of the O.T.C. provisions.
It would be quite wrong if a company were lured to this country because of these provisions and then when those provisions were withdrawn we were to enforce against it statutory difficulties in removing its domicile from this country.

Mr. MacDermot: I dislike answering hypothetical questions. I do not know whether my hon. Friend or any other hon. Member can give me an example of any such companies.

Mr. Lever: I deplore bandying about the affairs of individual companies across the Floor of the Committee. I do not intend to take part in it. I shall ask my hon. and learned Friend to accept my assurance that I do not raise this matter as an exercise in hypothetics. I happen to know one case at any rate where a man claims that his company came to this country precisely because of these facilities. All I want is an assurance as a matter of principle, if such cases do exist, we shall not have it said against us that we brought people here, as it were, by false pretences and that some

arrangements will be made to give fair play to those who can genuinely satisfy the authorities that they came here in order to obtain these facilities which are now being withdrawn.

Mr. John Wells: My right hon. Friend the Member for Thirsk and Malton (Mr. Turton) has dealt with the Commonwealth aspect. I want to deal briefly with the effect on Ceylon alone. It has long been a tradition of retiring planters and planters about to retire in Ceylon to invest their savings in plantation companies. Many of these plantation companies derived benefits from the O.T.C. system and with this provision these retiring planters will be in an even worse financial position than they are in today. I would draw the attention of the Financial Secretary to some of the simple facts of life.
As far as these people are concerned the Ceylon Government, or the previous Ceylon Government, as advised by our Government's present advisers allowed these people to bring out what they call a lakh and a half of rupees, that is, approximately £15,000, on retirement. This represents their life savings. They come to this country where they have not been insured under the Health Service, where they draw no retirement benefits, and they are faced with buying a house and insuring themselves, and providing out of the residue of this money for a pension. They are going to be in a very much worse position than many people with humble executive appointments in our own country. This subsection will have a very adverse effect on those companies, from which these retired people draw the bulk of their income.
Secondly, it will have an adverse effect on the essential need for modernising the tea gardens. Many London-based tea companies have been waiting to see what would be the outcome of the recent Ceylon elections and, now they have seen, they are prepared to invest widely and substantially in the tea plantations there. But with this subsection thrust before them it will be virtually impossible for them to maintain their renewals and replacements in the gardens and continue to pay the dividends, which it has been traditional for the holders of their shares to expect.
People who buy shares in a tropical company realise that they are taking a heavy risk and they expect to have a substantial return in those years when they get a good return. I would remind the Financial Secretary that this subsection will have a bad effect, both on the economy of Ceylon and upon the position of retired British subjects who have given their life's work to that island. I hope the Government will review this again before the Report stage. If they cannot review it again, for some reason which the Financial Secretary may give us later, I hope that they will look at the particular plight of these two bodies of people in our Commonwealth, namely, the retired planters and the tea garden estate managers.

11.0 p.m.

Mr. David Webster: I am happy to support my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow), who has allowed me to put my name to his Amendment. I want, first, to talk about the Malaysian situation and the rubber plantations. Unlike my hon. Friend, I have no interest at stake here, but I think that to take away the status of the overseas trading corporations is very much against the policy which the Government are at present pursuing in Malaysia. If one takes away their status then the dividend cover will be reduced considerably and, possibly, the dividened itself will be reduced. That is as it may be, but it will certainly mean that there will be less to plough back for replanting these rubber plantations.
At the time of the Communist uprising in Malaya one of the great features of the Templer plan was not only to crush the rising but to get the villagers on our side by introducing a major replanting operation with assistance from this country. Now at one stroke of the pen we are taking away our ability to do this while at the same time the Prime Minister states that he supports Vietnam and the situation in Malaysia. He is, as far as I can see, going to hand over Malaysia on a plate.
I would remind the Financial Secretary that Malaysia has earned tremendous reserves and banked them in this country and has also been a large dollar earner.

The price of natural rubber may fluctuate considerably and it may be at a disadvantage as against synthetic rubber, but I would have thought that to take away the overseas trading corporation status of Malaysian rubber companies would deal a body blow and mean a very serious loss to Malaysia's economy.
To come to the other product, tin—and again I have no interest whatever to declare—the tin companies have considerable expenditure on river dredgers. For them the Bill means, if their sometimes slender dividend cover is cut, or if they cannot maintain a dividend, a reduction in their reserves. Copra plantations, fibre plantations, will also be very much damaged, and this in an area which cannot depend on manufactured products; but which depends very much on raw material products. It will be dealt a really shattering blow by the Government's proposals. The whole of the present policy of the Government of trying to protect the Far East will be undermined by the Government's own economic tactic. I am quite convinced that we shall have another Pavlovian display by the Government.
It was said that Sir Jock Campbell did not make cheerful enough remarks when the Chancellor gave concessions in the past. This is because the Chancellor makes a practice of making concessions at 11 o'clock at night. Having first of all given us absolutely the worst possible consideration and the worst possible terms in the Bill, he then brings in a concession and expects everybody to cheer. The fact is he causes so much unsettlement. I hope he will be here shortly and in a better mood than he was earlier on and will make some concession upon this point. We heard from the Chancellor the day before yesterday that we were round the corner. Round the bend would perhaps be a more appropriate expression. The abolition of overseas trading company status is a longterm project, he says. It does not in any way solve the problem of the present-time and is thoroughly irrelevant and probably doctrinaire.
We have heard a good deal about oil companies today, and I shall not repeat all that, but we have also heard over the last three years from the present Prime Minister that the Commonwealth is the thing for him. First we heard it during


the Common Market discussions, because it was a way in which he could try to stultify the Common Market discussions. Then we heard it again during the election. Now that that is out of the way we hear nothing very much to the advantage of the Commonwealth. The only thing which seems to have happened is that we have given the Beatles the M.B.E. If we take away overseas trading company status we shall reduce London's status as a great financial centre. The Chancellor at present is doing everything within his power to try to save the £ and the currency. He should remember that if he takes away overseas trading company status from these companies he will reduce our chances of remaining a reserve currency. This is something for which he should have some concern.
We hear rather frightening noises from other parts of the world about trade booming, but it may not boom for all that time. I am not trying to knock anybody. I am quoting Mr. McChesney Martin, Chairman of the Federal Reserve Board. Not only he but other economists are anxious that there may be a turndown of international trade, and anything which is done to reduce overseas trading company status at the present time is going to add to that sort of pressure. I believe that there is a risk that it might happen towards the end of this year, and if the Government do not make some concession, they will be responsible in a considerable way for adding to this problem.

Mr. MacDermot: We have had a fairly full debate on these three Amendments, and I have been asked a considerable number of questions. It might, therefore, be convenient if I sought to answer them at this stage.
The main Amendment, which was moved by the hon. Member for Reading (Mr. Peter Emery), would omit from the Bill the provision abolishing overseas trade corporation status. As the Committee is aware, this status is granted to a company resident here, but which trades solely overseas, and, provided it qualifies for the status, the effect is that it is not liable to either Income Tax or Profits Tax here. The dividends, when distributed, are liable to tax, but the shareholder can set off against his

liability to Income Tax here any foreign tax which has been paid. The effect of this, in particular, is to give a strong inducement to people to invest in overseas trade corporations which are trading in countries where the rate of tax is lower than the United Kingdom rate.
The important point here is to see what effect the introduction of our Corporation Tax system has upon the O.T.C. companies. To put the matter quite shortly, the position is that as far as the companies are concerned, the advantage of O.T.C. status will largely disappear. This is reflected as a matter of £ s. d. in the fact that, as has already been announced by my right hon. Friend, the removal of the exemption of O.T.C.s from the liability to tax in relation to Corporation Tax involves merely the sum of £2 million a year. The removal of the advantage to the shareholder involves a greater sum, depending of course on the rate of the liability to tax, but it is estimated that the tax involved on distributed dividends to shareholders is between £25 million and £37 million.
The effect of the main Amendment in this respect is a little obscure. It is not clear from the Amendment, nor am I clear from the hon. Gentleman's speech whether the intention is merely to exempt O.T.C. profits from Income Tax—in which case the Amendment would have relatively little effect—or whether the intention is to preserve the existing treatment of dividends by which credit is given for the overseas tax. If the latter is intended, it is wholly unacceptable, for the reasons stated in the debate that we had recently on the question of overspill, namely, that it will conflict entirely with the whole principle of the separation of company from shareholder taxation.
The criticisms which have been made of the abolition of O.T.C. status concern two different classes of company, depending on how they are affected. In the O.T.C.s operating in countries where there is a higher rate of taxation than we have, the problem is essentially the one which we have been discussing in the former set of Amendments, namely, the question of overspill.
The objection is exactly the same, and the problem is the same as that of other


companies which will lose the advantage of overspill and will not be able to set off the foreign tax against the liability of the shareholder to United Kingdom tax. There is nothing I can add to the reasons which have already been given why we must reject these arguments. But most O.T.C.s are operating in countries where the overseas tax rate is about the same as ours is likely to be.
To give some examples—the tax rate in Malaya is 40 per cent., in Nigeria it is 40 per cent., in Australia it is 42.5 per cent., and so on.

Sir J. Barlow: Ceylon?

Mr. MacDermot: In Ceylon it is immensely high, but any difficulties which shareholders in Ceylon companies are having at the moment are due to the activities of the Ceylon Government rather than the United Kingdom Government.

Sir J. Barlow: Who advised them?

Mr. MacDermot: Perhaps if they had taken some of the advice that has been given and stood by it they would not be in the difficulty they are in now.
The problem with these companies is that they have been high distributors. In other words, they are faced with the same problem of the effect of Corporation Tax upon high distributors that United Kingdom companies will have. It is a problem peculiar to overseas trade corporations, and the whole object and purpose of the introduction of the Corporation Tax is to provide an incentive for companies to plough back rather than distribute.
Their problem is not a special one, other than that there are special problems for them in connection with transitional relief. This is a point which I was particularly asked to deal with by the hon. Member for Walthamstow, East (Mr. John Harvey). Representations have been made to my right hon. Friend pointing cut that owing to the special tax position of O.T.C.s up to now they would derive less advantage from the transitional relief provisions in the Bill than other companies who are faced with this problem which high distributors have as a result of the introduction of Corporation Tax.
My right hon. Friend has been impressed by these arguments, and on the Order Paper there appear, in the new Schedule, special additional transitional relief provisions. It would be out of order for me to go into them in detail, but, summarising them, the effect will be that these companies will be given relief under Clause 79, on the assumption that in the base year the overseas tax on exempt trading income was equivalent to the then rates of Income Tax and Profits Tax in this country, which in most cases will be a combined rate of 53¾ per cent. The result is that the O.T.C.s will receive the same kind of easement that United Kingdom companies would receive from the effect of the fall in the rate of company taxation. The fact that it is the high distributors who are really suffering and complaining shows that the O.T.C. scheme has largely failed in its object.
I come now to my answers to the main questions put by the hon. Member for Reading. He quoted from a speech made by his right hon. Friend the Member for Monmouth (Mr. Thorneycroft) when introducing the O.T.C. scheme. I want to supplement his quotation with another. The right hon. Gentleman made it clear when introducing the scheme that its object was to help United Kingdom companies to compete more effectively with locally-based companies operating under easier tax rules in relation to ploughback of profits. In commending his proposals to this Committee, he said:
I believe them to be a justifiable reform in our tax system and a legitimate help to companies that plough back their profits overseas in competition with those that operate under easier tax laws."—[OFFICIAL REPORT, 9th April, 1957; Vol. 568, c. 992.]
The hon. Member for Weston-super-Mare (Mr. Webster) and other hon. Members, speaking in support of these Amendments, indicated that it was on their policy of plough-back that these O.T.C. companies would suffer. Experience has shown—and the figures show, I think—that instead of using the considerable tax advantage of the O.T.C. scheme in order to increase their plough-back, the O.T.C. companies as a whole have used this tax advantage to swell the distributions to their shareholders.
11.15 p.m.
Comparing the rate of distribution of O.T.C. companies with those of other companies operating overseas, one finds that they have distributed a much higher proportion of their net earnings than United Kingdom companies operating overseas taken as a whole, and a considerably higher proportion than nonresident subsidiaries of United Kingdom parent companies. Taking all companies as a whole, the ratio is distribution of net dividends 48·5 per cent. and retentions 51·5 per cent. This compares with the sort of figure for all United Kingdom companies of distributions between 45 and 50 per cent. The nonresident subsidiaries of United Kingdom companies distributed only 43 per cent. and their retentions were 57 per cent.
Turning to the O.T.C. companies, their net dividend has been 68 per cent. and their retention 32 per cent. —

Mr. John Wells: Mr. John Wells rose—

Mr. MacDermot: I will finish this point, if I may.
These figures are even more striking if one looks at the distribution pattern of a selective sample—a representative sample selected from overseas trade corporations and comparing their distributions before and after the introduction of O.T.C. legislation. Their distributions before show that their net dividends were 22 per cent. and their retentions 19·5 per cent. This is after paying tax of 58·4 per cent. on their total profits. As a result of the introduction of the O.T.C. scheme, their tax liability was reduced to only 41·7 per cent. of their net profits. However, their distribution of net dividends rose from 22 per cent. to 35 per cent. while their retentions rose only from 19·5 per cent. to 23 per cent.
This shows, quite clearly, that three-quarters of the gain was used in order to increase dividends, and only one-quarter in order to increase retentions.

Mr. John Wells: That was the precise point which I was going to ask the Financial Secretary—to give us the figure before the introduction of the O.T.C. legislation and after. Could he say whether this selective sample—I think that that was the phrase he used—refers to all O.T.C.s over the whole range of overseas coun-

tries, or does it refer specifically to tropical countries and companies? I believe that the percentage for tropical countries would not at all bear out the figures which he has just given.

Mr. MacDermot: No, it is not confined to a particular class of O.T.C. company. It is a representative sample—I made a slip of the tongue in saying a "selective" sample. [Interruption.] Hon. Members can form their own conclusions. Perhaps they can do what has not been done yet and that is to bring forward examples to the Committee to indicate that, as a result of the O.T.C. legislation, what they consider to be representative companies have increased their plough-back. I was asked to give information and what information I have shows that the trend has been the other way.
This leads to the second main argument put against the abolition of O.T.C. status, which is that it would harm the developing countries. If the evidence was that the O.T.C.s had used the advantage to increase their plough-back, the argument would have a good deal more force than it has, but I do accept that the action which we have taken in introducing Corporation Tax will have a moderating effect on the O.T.C.s, as it will on all overseas investment. This is a matter which we have already debated at great length today and the Committee will not want me to go over the general argument again. It is also our intention to help developing countries within the limit of our ability, a matter to which my right hon. Friend referred to earlier. He said, as he has said before, that he will watch the position carefully and be ready to consider whether any new action is needed.
In this connection, it is right to point out that the companies which are investing in overseas countries with a high rate of taxation—the examples of Ceylon and India were given—will be worse off than those operating in the United Kingdom or in countries which have a similar rate of taxation to ours. This is due to the high overseas rates of taxation. I would only say that if the overseas countries want to encourage United Kingdom investment, it is up to them to consider what should be the right rate of taxation for them to impose on overseas investment, rather than


for them to expect the United Kingdom to give special tax reliefs in order to remove the disincentive effect of their own high rates of taxation.
It has been argued that the effect of the abolition of O.T.C. status would be to make those companies vulnerable to take over. That argument has been referred to, I think, by the Malaysian Chamber of Commerce and by a number of hon. Members. It relates to companies which have in the past been high distributors. It is said that as a result of this change they will be forced to reduce their dividends in order to maintain their retentions, and that this will result in a drop in the share values and expose them to that risk of take-over.
I would say that these are companies whose shares have been liable in the past to wide fluctuations and no action has been taken by investors abroad to make a take-over bid and seize control of the companies on those occasions when the share values have stood lower than the real value of the underlying assets. There seems very little ground, therefore, for the assumption that this would now be the result for those companies—

Sir J. Barlow: I can assure the hon. and learned Gentleman from very practical experience that in the past there have been a considerable number of takeover bidders—some of them successful and others not—when the prices of shares have been low. There were times five or six years ago when the assets of a London registered company were as much as the value of the shares, which placed the value of the estate at nothing. Provided the take-over bidders could get sufficient shares at 10 per cent. or 20 per cent. above the market value of the shares they could get the estates in Malaysia for virtually nothing—as some did. I have had considerable experience both of offering and of being shot at, so I know something about it. I can assure the Financial Secretary that he is not correct in a what he says.

Mr. George Y. Mackie: Surely there is a big difference between a take-over when shares are depressed because of political conditions, or because of the rubber market, and when there is depression of shares because of a change of taxation in this country?

Mr. MacDermot: There is, of course, a difference. But if the hon. Member for Middleton and Prestwich (Sir J. Barlow) is correct, he is supplying the answer to the hon. Member.
I do not deny that there may be circumstances in which there will be pressure of this kind. All I am saying is that it is our considered view that these fears have been exaggerated. We do not think the removal of O.T.C. status will have the effect which is suggested.
This argument is coupled with the argument that the result of the abolition of O.T.C. status will provide an incentive to these companies to emigrate. I intervened to seek information as to how it was suggested it would be to the tax advantage of shareholders here for these companies to emigrate. It certainly appeared to me, on considering the matter, that it would be only in cases where a large proportion of the shareholders of a company were overseas residents that there would be likely to be any real incentive or pressure for emigration. I think that from the examples given in committee that it was those cases, which I imagine are rather exceptional cases, that were being pleaded for.
My hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) asked me specifically to deal with the case of a company which had been lured here by the attraction of the tax advantage of O.T.C. status and whether that would be taken into account if an application were made for Treasury permission to emigrate under Section 468. I cannot commit anyone in advance on that, but it would obviously be a relevant consideration and one that would be taken into account in considering an applicaton of that kind.
The hon. Member for Walthamstow, East asked me to deal with the question of losses and whether some consideration could be given to accumulated losses to companies on abolition of status. I do not think that is a matter that would be right or in accordance with principle. The fact is that these companies have been exempt from liability to British tax. There is no reason, in these circumstances, why they should be allowed to carry forward losses they may have made in the past against liability to tax in the future, when they have been wholly exempt from liability up to now.
The final argument was put by the hon. Member for Reading in his speech. He pointed out that the introduction of the O.T.C. scheme was something that was carrying out the recommendation of the majority of the Royal Commission of 1955. I remember the debates on the original O.T.C. scheme because it was the first Finance Bill I attended, having appeared as a result of a by-election shortly before. The hon. Member quoted from Mr. Patrick Gordon Walker's speeches on that occasion. I would like to conclude by quoting some words of his on this subject.
11.30 p.m.
On the Second Reading of the Finance Bill in 1957, when dealing with the proposal for the O.T.C. scheme, Mr. Gordon Walker was expressing his fears that it was rash to provide too much incentive to overseas investment, and he said:
If we have too much overseas investment it must be at the expense of home investment. There is a great deal of evidence that overseas investment is now, in spite of what everyone is saying, running at about as high a level as we can afford. So far as I can make out, in the years 1953 to 1956 overseas investment was, on an average, about £200 million a year, which was more than twice the balance of payments surplus on current account.
Over the last 10 years overseas investment has been running at considerably more than twice what we have been earning on current account. He went on:
The amount that we are earning on current balances in our balance of payments must set some limit to the amount of overseas investment that we can make in any particular period. If in those circumstances overseas investment is too far increased, it will give us a very grave balance of payments problem because an increase in overseas investment reduces the foreign exchange available to buy imports. … We are worried about the short-run strain, especially with our very depleted resources. Even the long-term effects can be grave if home investment is falling, because home investment is the source of all our future output."—[OFFICIAL REPORT, 7th May, 1957; Vol. 569, c. 828–9.]
Those fears that he expressed have, I think, been fully justified, and also justified the opposition to the introduction of the O.T.C. scheme which we made when we were in Opposition. So it is not that we have set out in this Finance Bill to single out O.T.C. schemes for any special treatment and to abolish them. What

we have done is to introduce the Corporation Tax system which will really in itself remove the advantage which the O.T.C. scheme gave to such companies. For the same reasons that we opposed then the specially favourable treatment, we do not see any reason for seeking at this stage to renew it by making some special exception for them from the general provisions of the Corporation Tax.
The hon. Member for Middleton and Prestwich referred to the Amendment which would have the effect of delaying for 10 years the abolition of the O.T.C. scheme. All I say about that is that, subject to the transitional relief that we have extended, if it is right to abolish this scheme, as we believe it is, now is the time to do it when we are going over to the new taxation system.
The right hon. Member for Thirsk and Malton (Mr. Turton) spoke to the Amendment, a variant of that one, which would continue the O.T.C. scheme for the Commonwealth. The fact is, of course, that the great majority of O.T.C. companies are operating within the Commonwealth. I can illustrate that by saying, as I have explained already, that the exemption of O.T.C.s from the operation of the Corporation Tax scheme would cost some £2 million. If we were to leave it for Commonwealth O.T.C.s alone, it would be some £1½ million, or three quarters of the total.
So it is not really as though there is some small class here for which we are being asked to make a special exemption. This would not be justifiable. If we thought it right to leave the scheme for these Commonwealth O.T.C.s, we should be accepting the argument that it was right to leave it for all O.T.C.s. For the reason that I have given, we do not think it is right, and I must advise the Committee to reject the Amendments.

Sir E. Boyle: My hon. Friend the Member for Reading (Mr. Peter Emery) moved the Amendment with a speech which I think the Committee found valuable, and I am sure that we are grateful to the Financial Secretary for having answered many of his points. But it must be becoming obvious to the Committee that we have quite a hard night and early morning ahead of us, and, therefore, I hope the Committee will not think me


discourteous if I do not reply to the debate with a speech as long as that which the Financial Secretary has just made. As the Financial Secretary has clearly explained, the companies that we are considering in these Amendments are United Kingdom companies controlled and managed from this country, but having all their actual trading operations abroad.
Perhaps it is worth remembering that when the O.T.C. scheme was introduced in the 1957 Finance Act, although admittedly it attracted a good deal of criticism from the Opposition of that time, nonetheless my right hon. Friend the Member for Monmouth (Mr. Thorneycroft) brought in the O.T.C. scheme at a time when there was a good deal of criticism on the grounds not that we were treating overseas profits and overseas investments too leniently but, on the contrary, that they were being too heavily taxed. As my right hon. Friend the Member for Monmouth pointed out in the Budget debate, the position had been much criticised over many years on the ground that the United Kingdom concern trading in an overseas country where tax rates were lower than ours was at a disadvantage compared with local competitors. That was distinctly the feeling at the time and it found echoes in the Royal Corn-mission Report, not only the majority Report but the often quoted minority Report as well.
In paragraph 175 of the minority Report, the Report which set out the case for a Capital Gains Tax amongst other things, the authors said:
We appreciate the economic advantage of removing a discouragement to maintaining the central management of a concern in this country in the case of a British company that derives all, or substantially all, its income from overseas operations …
It is true, as the Financial Secretary reminded us, that there was a good deal of criticism from the Opposition in those debates. On the other hand, I recall an Amendment which Mr. Gordon Walker himself moved, which would have preserved O.T.C.s at any rate in the Commonwealth. His Amendment to the Finance Bill of 1957 linked with the speech and the Amendment which my right hon. Friend the Member for Thirsk and Malton (Mr. Turton) moved tonight.
We should not be under any doubts as to the importance which some Commonwealth countries attach to O.T.C.s. I think my right hon. Friend the Member for Bexley (Mr. Heath) has already referred to the aide memoire which the Finance Minister of Malaysia has sent to the Chancellor of the Exchequer on this subject. It is interesting that the Finance Minister of Malaysia has said that it is quite right that the Malaysian Federal Government should do everything that it can to assist such companies should they wish to transfer to Malaysia.
I do not think we ought to be under any doubt at all about the importance of this aspect of Clause 60. My hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) explained clearly the history of this matter and also the very distinguished part that many of these companies have played in Commonwealth countries.
Before I come to my last remarks I should like to refer to one or two detailed points which have been made in the debate. We are glad to hear from the Financial Secretary of the new provisions in connection with Clause 79 that the Chancellor has brought in. I am not sure whether the Financial Secretary fully realised the point that my hon. Friend the Member for Walthamstow, East (Mr. John Harvey) had in mind when he talked about losses. I think my hon. Friend's point was that some O.T.C.s might well at the moment be in the investment stage of a development which is as yet making no profits, and this is a serious matter which merits special consideration by the Government. I press the hon. and learned Gentleman to say that he will look at this again before Report, because there is a perfectly real point here of the situation that could arise in the case of a number of O.T.C.s.
Also on the question of Section 468, this may possibly have a rather bigger reference than the Financial Secretary suggested. If this Amendment is defeated and the Government go ahead with their plans for bringing O.T.C. status to an end, this will put more strain on Section 468. It will raise all the arguments which many of us can remember over many years in these debates about companies wishing to emigrate. I can remember the many long debates which we had in 1951 on what was Clause 33


of the Finance Bill of that year. This is a difficult matter, but undoubtedly the Government's intention will put more strain on Section 468.
Incidentally, this would be all the more so but for the fact that as a Government we never extended O.T.C. status beyond what was reasonable. Many people would say that we were too restrictive in not including, for example, finance houses within the O.T.C. status. There was a case for the limitation which my right hon. Friend the Member for Monmouth put, but no one could say that this was a status which was in any way extended too widely.
The Financial Secretary asked what we had in mind in putting down this Amendment: did we, in the light of the Corporation Tax, simply wish to exempt O.T.C. profits, or did we wish to preserve the existing treatment of dividends? I will give the Financial Secretary an answer, and it is the opposite side of the coin which he produced at the end of his speech. We were concerned not just with exempting O.T.C. profits, but with the existing treatment of dividends. Having devoted some hours to the previous group of Amendments, in which we objected to the treatment under the Corporation Tax of overseas investment from the point of view of the company and the shareholder, we would have been entirely inconsistent if we then took a completely different line on O.T.Cs. and merely concerned ourselves with O.T.C. profits.
The Financial Secretary is quite right in saying that if one is merely concerned with the profits of O.T.Cs. the rate of Corporation Tax, even under this Government, is not likely to be so high that a very large point will arise. Our moving of this Amendment is linked to our complaints about the Government's treatment of overspill and their attitude to double taxation in this Clause.
The Financial Secretary showed clearly and frankly towards the end of his speech that this subsection is a part of the overseas consequentials, the overseas implications, of bringing in the Corporation Tax. We should be wrong to let this Amendment go without a Division because I believe that if the Government of the day decide to bring

O.T.C. status to an end, and if the Opposition let it go without a Division, it is a very clear intimation that this is something tacitly acquiesced in on both sides of the Committee. I would therefore advise the Committee to divide both on the Amendment to leave out subsection (3) and the Amendment moved by my hon. Friend the Member for Middleton and Prestwich.
But we have an additional reason for wishing to divide the Committee. As the Financial Secretary has clearly shown that this subsection is part and parcel of the Government's attitude to the tax treatment of companies operating overseas—a treatment which we have protested about earlier today—I would ask my hon. Friends to carry the Amendment into the Division Lobby.

11.45 p.m.

Mr. Geoffrey Hirst: I will not detain the Committee for long. Throughout our discussion of the Amendment I have sought to speak. The last time I rose the Financial Secretary cut me out, by no means for the first time in our deliberations in Committee. I assure the hon. and learned Gentleman that it is not easy to cut me out of this sort of debate.
I am glad that my right hon. Friend the Member for Birmingham, Hands-worth (Sir E. Boyle) indicated that we will divide on this Amendment and the one being discussed with it. Although I do not have a personal interest to declare in O.T.C.s, I have for long been interested in this matter. Like my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow), I have moved many technical Amendments when we have previously discussed O.T.C. legislation.
The Financial Secretary's observations revealed once again that the Government do not have a clear picture of the trading pattern of this country and what their proposals will mean to the large number of companies concerned, particularly those which operate in the Commonwealth. The hon. and learned Gentleman cannot dismiss the matter with a few statistics. He will know that if he has read the recent statements issued by the Rubber Growers' Association, the Hudson Bay Company and so on. Nor can


he defend the Government on the basis of what has happened in the past because rubber prices have been falling and fears about take-overs have not existed. There is all the difference in the world between a reduction of share prices because of a fall in rubber prices, with a consequential lowering of prices throughout the world, and a political move by the Government to depress the prices of British company shares.
We have heard a lot about portfolio investments, but that is not a one-way traffic. There are a great many holding companies which have been highly successful and which have attracted a great deal of investment to this country It is obvious—and the Financial Secretary admitted it—that this is another effort to divide the shareholder from the company. This makes absolute nonsense of the free enterprise system, and if hon. Gentlemen opposite do not believe in that system, they should rewrite

their election manifesto in more honest terms.

Mr. MacDermot: Would the hon. Gentleman say whether he considers that there is a free enterprise system in America?

Mr. Hirst: Certainly there is. They know how to work it a great deal better than hon. Gentlemen opposite.

Mr. MacDermot: The Americans have a Corporation Tax which separates the taxation of companies—[Interruption]—from the taxation of shareholders.

Mr. Hirst: They have a much lower level of ordinary taxation, and the hon. and learned Gentleman knows it.

Question put, That the words proposed be left out, to the end of line 7, stand part of the Clause:—

The Committee divided: Ayes 159, Noes 152.

Division No. 178.]
AYES
[11.48 p.m.


Allaun, Frank (Salford, E.)
Fletcher, Sir Eric (Islington, E.)
McBride, Neil


Alldritt, Walter
Fletcher, Raymond (Ilkeston)
McCann, J.


Allen, Scholefield (Crewe)
Floud, Bernard
MacDermot, Niall


Armstrong, Ernest
Foley, Maurice
McGuire, Michael


Atkinson, Norman
Foot, Michael (Ebbw Vale)
McInnes, James


Barnett, Joel
Ford, Ben
Mackenzie, Gregor (Rutherglen)


Baxter, William
Fraser, Rt. Hn. Tom (Hamilton)
Mackie, John (Enfield, E.)


Bence, Cyril
Freeson, Reginald
MacMillan, Malcolm


Benn, Rt. Hn. Anthony Wedgwood
Garrett, W. E.
Mahon, Peter (Preston, S.)


Bennett, J. (Glasgow, Bridgeton)
Garrow, A.
Mahon, Simon (Bootle)


Binns, John
George, Lady Megan Lloyd
Manuel, Archie


Bishop, E. S.
Gourlay, Harry
Mapp, Charles


Blenkinsop, Arthur
Gregory, Arnold
Mason, Roy


Boston, T. G.
Grey, Charles
Maxwell, Robert


Bradley, Tom
Griffiths, David (Rother Valley)
Mayhew, Christopher


Bray, Dr. Jeremy
Griffiths, Will (M'chester, Exchange)
Mellish, Robert


Brown, Hugh D. (Glasgow, Provan)
Hamilton, James (Bothwell)
Mendelson, J. J.


Brown, R. W. (Shoreditch amp; Fbury)
Hamilton, William (West Fife)
Miller, Dr. M. S.


Buchan, Norman (Renfrewshire, W.)
Hamling, William (Woolwich, W.)
Morris, Alfred (Wythenshawe)


Buchanan, Richard
Hannan, William
Mulley, Rt. Hn. Frederick (SheffieldPk)


Butler, Herbert (Hackney, C.)
Harper, Joseph
Murray, Albert


Butler, Mrs. Joyce (Wood Green)
Hattersley, Roy
Norwood, Christopher


Callaghan, Rt. Hn. James
Hazell, Bert
O'Malley, Brian


Carmichael, Neil
Heffer, Eric S.
Oram, Albert E. (E. Ham, S.)


Coleman, Donald
Herbison, Rt. Hn. Margaret
Orbach, Maurice


Conlan, Bernard
Hobden, Dennis (Brighton, K'town)
Page, Derek (King's Lynn)


Corbet, Mrs. Freda
Holman, Percy
Paget, R. T.


Crawshaw, Richard
Horner, John
Palmer, Arthur


Crosland, Rt. Hn. Anthony
Howie, W.
Pannell, Rt. Hn. Charles


Cullen, Mrs. Alice
Hughes, Emrys (S. Ayrshire)
Parker, John


Dalyell, Tam
Irving, Sydney (Dartford)
Parkin, B. T.


Davies, G. Elfed (Rhondda, E.)
Jeger, Mrs. Lena (H'b'namp;St.P'cras, S.)
Pentland, Norman


Dell, Edmund
Jenkins, Hugh (Putney)
Prentice, R. E.


Diamond, John
Johnson, Carol (Lewisham, S.)
Pursey, Cmdr. Harry


Dodds, Norman
Johnson, James (K'ston-on-Hull, W.)
Rees, Merlyn


Doig, Peter
Jones, Rt. Hn. Sir Elwyn(W.Ham, S.)
Reynolds, G. W.


Driberg, Tom
Jones, J. Idwal (Wrexham)
Richard, Ivor


Duffy, Dr. A. E. P.
Jones, T. W. (Merioneth)
Robertson, John (Paisley)


Dunn, James A.
Kelley, Richard
Rogers, George (Kensington, N.)


Dunnett, Jack
Kerr, Mrs. Anne (R'ter amp; Chatham)
Sheldon, Robert


Edelman, Maurice
Ledger, Ron
Shore, Peter (Stepney)


Edwards, Robert (Bilston)
Lever, Harold (Cheetham)
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


English, Michael
Lipton, Marcus
Silkin, John (Deptford)


Evans, Albert (Islington, S.W.)
Loughlin, Charles
Silverman, Julius (Aston)


Fitch, Alan (Wigan)
Mabon, Dr. J. Dickton
Skeffington, Arthur




Slater, Mrs. Harriet (Stoke, N.)
Varley, Eric G.
Williams, Mrs. Shirley (Hitchin)


Small, William
Wainwright, Edwin
Woodburn, Rt. Hn. A.


Snow, Julian
Walden, Brian (All Saints)
Woof, Robert


Steele, Thomas (Dunbartonshire, W.)
Wallace, George
Wyatt, Woodrow


Strauss, Rt. Hn. G. R. (Vauxhall)
Weatherill, Bernard
Yates, Victor (Ladywood)


Thomas, Iorwerth (Rhondda, W.)
Weitzman, David
Zilliacus, K.


Thomson, George (Dundee, E.)
Wells, William (Walsall, N.)
TELLERS FOR THE NOES:


Tomney, Frank
Whitlock, William
Mr. George Lawson and


Tuck, Raphael
Wilkins, W. A.
Mr. Ifor Davies.




NOES


Agnew, Commander Sir Peter
Gilmour, Sir John (East Fife)
More, Jasper


Alison, Michael (Barkston Ash)
Glover, Sir Douglas
Morrison, Charles (Devizes)


Allan, Robert (Paddington, S.)
Glyn, Sir Richard
Mott-Radclyffe, Sir Charles


Allason, James (Hemel Hempstead)
Goodhew, Victor
Munro-Lucas-Tooth, Sir Hugh


Anstruther-Gray, Rt. Hn. Sir W.
Grant, Anthony
Murton, Oscar


Awdry, Daniel
Grant-Ferris, R.
Neave, Airey


Baker, W. H. K.
Gresham Cooke, R.
Noble, Rt. Hn. Michael


Barber, Rt. Hn. Anthony
Grieve, Percy
Onslow, Cranley


Barlow, Sir John
Griffiths, Peter (Smethwick)
Osborn, John (Hallam)


Batsford, Brian
Grimond, Rt. Hn. J.
Osborne, Sir Cyril (Louth)


Bell, Ronald
Hall, John (Wycombe)
Page, R. Graham (Crosby)


Bennett, Dr. Reginald (Gos amp; Fhm)
Hall-Davis, A. G. F.
Peel, John


Berry, Hn. Anthony
Hamilton, Marquess of (Fermanagh)
Percival, Ian


Bessell, Peter
Harrison, Col. Sir Harwood (Eye)
Peyton, John


Bingham, R. M.
Harvey, John (Walthamstow, E.)
Pounder, Rafton


Birch, Rt. Hn. Nigel
Hastings, Stephen
Powell, Rt. Hn. J. Enoch


Black, Sir Cyril
Hawkins, Paul
Price, David (Eastleigh)


Blaker, Peter
Heald, Rt. Hn. Sir Lionel
Prior, J. M. L.


Box, Donald
Heath, Rt. Hn. Edward
Pym, Francis


Boyle, Rt. Hn. Sir Edward
Hendry, Forbes
Redmayne, Rt. Hn. Sir Martin


Brinton, Sir Tatton
Higgins, Terence L.
Ridley, Hn. Nicholas


Brown, Sir Edward (Bath)
Hill, J. E. B. (S. Norfolk)
Ridsdale, Julian


Bruce-Gardyne, J.
Hirst, Geoffrey
Roberts, Sir Peter (Heeley)


Buck, Antony
Hobson, Rt. Hn. Sir John
Rodgers, Sir John (Sevenoaks)


Buxton, Ronald
Hordern, Peter
Roots, William


Carlisle, Mark
Hornby, Richard
Scott-Hopkins, James


Carr, Rt. Hn. Robert
Hunt, John (Bromley)
Sharples, Richard


Channon, H. P. G.
Jenkin, Patrick (Woodford)
Shepherd, William


Chataway, Christopher
Johnston, Russell (Inverness)
Sinclair, Sir George


Chichester-Clark, R.
Jopling, Michael
Smith, Dudley (Br'ntf'd amp; Chiswick)


Clark, William (Nottingham, S.)
Kerr, Sir Hamilton (Cambridge)
Steel, David (Roxburgh)


Cordle, John
Kershaw, Anthony
Studholme, Sir Henry


Corfield, F. V.
King, Evelyn (Dorset, S.)
Summers, Sir Spencer


Crawley, Aidan
Kirk, Peter
Talbot, John E.


Crowder, F. P.
Lancaster, Col. C. G.
Taylor, Edward M. (G'gow, Cathcart)


Curran, Charles
Langford-Holt, Sir John
Taylor, Frank (Moss Side)


Dalkeith, Earl of
Lloyd, Rt. Hn.Geoffrey (Sut'nC'dfield)
Thorpe, Jeremy


Davies, Dr. Wyndham (Perry Barr)
Longbottom, Charles
Turton, Rt. Hn. R. H.


Dean, Paul
Longden, Gilbert
van Straubenzee, W. R.


Deedet, Rt. Hn. W. F.
Lubbock, Eric
Walder, David (High Peak)


Eden, Sir John
MacArthur, Ian
Walker, Peter (Worcester)


Elliot, Capt. Walter (Carshalton)
Mackie, George Y. (C'ness amp; S'land)
Ward, Dame Irene


Emery, Peter
Maclean, Sir Fitzroy
Webster, David


Errington, Sir Eric
Macleod, Rt. Hn. Iain
Whitelaw, William


Eyre, Reginald
Marples, Rt. Hn. Ernest
Wilson, Geoffrey (Truro)


Fell, Anthony
Mathew, Robert
Wise, A. R.


Fletcher-cooke, Charles (Darwen)
Maude, Angus
Yates, William (The Wrekin)


Foster, Sir John
Mawby, Ray
Younger, Hn. George


Fraser,Rt.Hn.Hugh(St'fford amp; Stone)
Maxwell-Hyslop, R. J.



Fraser, Ian (Plymouth, Sutton)
Maydon, Lt.-Cmdr. S. L. C.
TELLERS FOR THE NOES:


Gibson-Watt, David
Mitchell, David
Mr. Martin McLaren and


Gilmour, Ian (Norfolk, Central)
Monro, Hector
Mr. R. W. Elliott.

Amendment proposed: In page 76, line 7, at end insert:
after 6th April 1976".—[So. J. Barlow.]

Question put, That those words be there inserted:—

The Committee divided: Ayes 152, Noes 158.

Division No. 179.]
AYES
[11.59 p.m.


Agnew, Commander Sir Peter
Batsford, Brian
Box, Donald


Alison, Michael (Barkston Ash)
Bell, Ronald
Boyle, Rt. Hn. Sir Edward


Allan, Robert (Paddington, S.)
Bennett, Dr. Reginald (Gos amp; Fhm)
Brintorr, sir Tatton


Allason, James (Hemel Hempstead)
Berry, Hn. Anthony
Brown, Sir Edward (Bath)


Anstruther-Gray, Rt. Hn. Sir W.
Bessell, Peter
Bruce-Gardyne, J.


Awdry, Daniel
Bingham, R. M.
BucK, Antony


Baker, W. H. K.
Birch, Rt. Hn. Nigel
Buxton, Ronald


Barber, Rt. Hn. Anthony
Black, Sir Cyril
Carlisle, Mark


Barlow, Sir John
Blaker, Peter
Carr, Rt. Hn. Robert




Channon, H. P. G.
Heath, Rt. Hn. Edward
Osborne, Sir Cyril (Louth)


Chataway, Christopher
Hendry, Forbes
Page, R. Graham (Crosby)


Chichester-Clark, R.
Higgins, Terence L.
Peel, John


Clark, William (Nottingham, S.)
Hill, J. E. B. (S. Norfolk)
Percival, Ian


Cordle, John
Hirst, Geoffrey
Peyton, John


Corfield, F. V.
Hobson, Rt. Hn. Sir John
Pounder, Rafton


Crawley, Airdan
Hordern Peter
Powell, Rt. Hn. J. Enoch


Crowder, F. P.
Hornby, Richard
Price, David (Eastleigh)


Curran, Charles
Hunt, John (Bromley)
Prior, J. M. L.


Dalkeith, Earl of
Jenkin, Patrick (Woodford)
Pym, Francis


Davies, Dr. Wyndham (Perry Barr)
Johnston, Russell (Inverness)
Redmayne, Rt. Hn. Sir Martin


Dean, Paul
Jopling, Michael
Ridley, Hn. Nicholas


Deedes, Rt. Hn. W. F.
Kerr, Sir Hamilton (Cambridge)
Ridsdale, Julian


Eden, Sir John
Kershaw, Anthony
Roberts, Sir Peter (Heeley)


Elliot, Capt. Walter (Carshalton)
King, Evelyn (Dorset, S.)
Rodgers, Sir John (Sevenoaks)


Emery, Peter
Kirk, Peter
Roots, William


Errington, Sir Eric
Lancaster, Col. C. G.
Scott-Hopkins, James


Eyre, Reginald
Langford-Holt, Sir John
Sharples, Richard


Fell, Anthony
Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)
Shepherd, William


Fletcher-Cooke, Charles (Darwen)
Longbottom, Charles
Sinclair, Sir George


Foster, Sir John
Longden, Gilbert
Smith, Dudley (Br'ntf'd amp; Chiswick)


Fraser, Rt. Hn. Hugh (St'fford amp; Stone)
Lubbock, Eric
Steel, David (Roxburgh)


Fraser, Ian (Plymouth, Sutton)
MacArthur, Ian
Studholme, Sir Henry


Gibson-Watt, David
Mackie, George Y. (C'ness amp; S'land)
Summers, Sir Spencer


Gilmour, Ian (Norfolk, Central)
Maclean, Sir Fitzroy
Talbot, John E.


Gilmour, Sir John (East Fife)
Macleod, Rt. Hn. lain
Taylor, Edward M. (G'gow,Cathcart)


Glover, Sir Douglas
Marples, Rt. Hn. Ernest
Taylor, Frank (Moss Side)


Glyn, Sir Richard
Mathew, Robert
Thorpe, Jeremy


Goodhew, Victor
Maude, Angus
Turton, Rt. Hn. R. H.


Grant, Anthony
Mawby, Ray
van Straubenzee, W. R.


Grant-Ferris, R.
Maxwell-Hyslop, R. J.
Walder, David (High Peak)


Gresham Cooke, R.
Maydon, Lt.-Cmdr. S. L. C.
Walker, Peter (Worcester)


Grieve, Percy
Mitchell, David
Ward, Dame Irene


Griffiths, Peter (Smethwick)
Monro, Hector
Webster, David


Grimond, Rt. Hn. J.
More, Jasper
Whitelaw, William


Hall, John (Wycombe)
Morrison, Charles (Devizes)
Wilson, Geoffrey (Truro)


Hall-Davis, A. G. F.
Mott-Radclyffe, Sir Charles
Wise, A. R.


Hamilton, Marquess of (Fermanagh)
Munro-Lucas-Tooth, Sir Hugh
Yates, William (The Wrekin)


Harrison, Col. Sir Harwood (Eye)
Murton, Oscar
Younger, Hn. George


Harvey, John (Walthamstow, E.)
Neave, Airey



Hastings, Stephen
Noble, Rt. Hn. Michael
TELLERS FOR THE NOES:


Hawkins, Paul
Onslow, Cranley
Mr. Martin McLaren and


Heald, Rt. Hn. Sir Lionel
Osborn, John (Hallam)
Mr. R. W. Elliott.




NOES


Allaun, Frank (Salford, E.)
Dunn, James A.
Jenkins, Hugh (Putney)


Alldrltt, Walter
Dunnett, Jack
Johnson, Carol (Lewisham, S.)


Allen, Scholefield (Crewe)
Edelman, Maurice
Johnson, James (K'ston-on-Hull, W.)


Armstrong, Ernest
Edwards, Robert (Bilston)
Jones, Rt. Hn. SirElwyn (W. Ham, S.)


Atkinson, Norman
English, Michael
Jones, J. Idwal (Wrexham)


Barnett, Joel
Evans, Albert (Islington, S.W.)
Jones, T. W. (Merioneth)


Baxter, William
Fitch, Alan (Wigan)
Kelley, Richard


Bence, Cyril
Fletcher, Sir Eric (lslington, E.)
Kerr Mrt. Anne (R'ter amp; Chatham)


Benn, Rt. Hn. Anthony Wedgwood
Fletcher, Raymond (Iikeston)
Ledger, Ron


Bennett, J. (Glasgow, Bridgeton)
Floud, Bernard
Lever, Harold (Cheetham)


Binns, John
Foley, Maurice
Lipton, Marcus


Bishop, E. S.
Foot, Michael (Ebbw Vale)
Loughlin, Charles


Blenkinsop, Arthur
Ford, Ben
Mabon, Dr. J. Dickson


Boston, T. G.
Fraser, Rt. Hn. Tom (Hamilton)
McBride, Neil


Bradley, Tom
Freeson, Reginald
McCann, J.


Bray, Dr. Jeremy
Garrett, W. E.
MacDermot, Niall


Brown, Hugh D. (Glasgow, Provan)
Garrow, A.
McGuire, Michael


Brown, R. W. (Shoreditch amp; Fbury)
George, Lady Megan Lloyd
Mclnnes, James


Buchan, Norman (Renfrewshire. W.)
Gourlay, Harry
MacKenzie, Gregor (Rutherglen)


Buchanan, Richard
Gregory, Arnold
Mackie, John (Enfleld, E.)


Butler, Herbert (Hackney, C.)
Grey, Charles
MacMillan, Malcolm


Butler, Mrs. Joyce (Wood Green)
Griffiths, Will (M'chester, Exchange)
Mahon, Peter (Preston, S.)


Callaghan, Rt. Hn. James
Hamilton, James (Bothwell)
Mahon, Simon (Bootle)


Carmichael, Neil
Hamilton, William (West Fife)
Manuel, Archie


Coleman, Donald
Hamling, William (Woolwich, W.)
Mapp, Charles


Conlan, Bernard
Hannan, William
Mason, Roy


Corbet, Mrs. Freda
Harper, Joseph
Maxwell, Robert


Crawshaw, Richard
Hattersley, Roy
Mayhew, Christopher


Crosland, Rt. Hn. Anthony
Hazell, Bert
Mellish, Robert


Cullen, Mrs. Alice
Heffer, Eric S.
Mendelson, J. J.


Dalyell, Tam
Herbison, Rt. Hn. Margaret
Miller, Dr. M. S.


Davies, G. Elfed (Rhondda, E.)
Hobden, Dennis (Brighton, K'town.)
Morris, Alfred (Wythenshawe)


Dell, Edmund
Holman, Percy
Mulley,Rt.Hn.Frederick(SheffieldPk)


Diamond, John
Horner, John
Murray, Albert


Dodds, Norman
Howie, W.
Norwood, Christopher


Doig, Peter
Hughes, Emrys (S. Ayrshire)
O'Malley, Brian


Driberg, Tom
Irving, Sydney (Dartford)
Oram, Albert E. (E. Ham, S.)


Duffy, Dr. A. E. P.
Jeger, Mrs. Lena (H'b'namp;St. P'cras, S.)
Orbach, Maurice







Page, Derek (King's Lynn)
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Wallace, George


Paget, R. T.
Silkin, John (Deptford)
Watkins, Tudor


Palmer, Arthur
Silverman, Julius (Aston)
Weitzman, David


Pannell, Rt. Hn. Charles
Skeffington, Arthur
Wells, William (Walsall, N.)


Parker, John
Slater, Mrs. Harriet (Stoke, N.)
Whitlock, William


Parkin, B. T.
Small, William
Wilkins, W. A.


Pentland, Norman
Snow, Julian
Williams, Mrs. Shirley (Hitchin)


Prentice, R. E.
Steele, Thomas (Dunbartonshire, W.)
Woodburn, Rt. Hn. A.


Pursey, Cmdr. Harry
Strauss, Rt. Hn. G. R. (Vauxhall)
Woof, Robert


Rees, Merlyn
Thomas, Iorwerth (Rhondda, W.)
Wyatt, Woodrow


Reynolds, G. W.
Thomson, George (Dundee, E.)
Yates, Victor (Ladywood)


Richard, Ivor
Tomney, Frank
Zilliacus, K.


Robertson, John (Paisley)
Tuck, Raphael



Rogers, George (Kensington, N.)
Varley, Eric G.
TELLERS FOR THE NOES:


Sheldon, Robert
Wainwright, Edwin
Mr. George Lawson and


Shore, Peter (Stepney)
Walden, Brian (All Saints)
Mr. Ifor Davies.

Question proposed, That the Clause stand part of the Bill.

Sir E. Boyle: I appreciate that we have been discussing this Clause for some hours and that the Committee will wish to come to a conclusion on it, but I should just like very briefly to ask the Government about one topic which has not so far, I think, figured in our discussion at all, namely, the Government's intentions about double taxation agreements with overseas countries, which, I would suggest, is very much within the ambit of subsection (1). This is a complex and technical issue, but I think I can put it in just a minute or two.
As I understand the position regarding portfolio investment, at present British companies, as it were, viewed from abroad, have their retentions taxed at 56¼ per cent., their distributed profits taxed at 15 per cent., and then there is withholding tax of 41¼ per cent. on dividends. The overseas investor can offset the 41 per cent. withholding tax against his own tax liability, if he has one. That is the present position. Then we have the new system which is envisaged in this Finance Bill. A company will, from the same standpoint, that is to say, looking at it from the point of view of someone abroad, have its retentions taxed at 40 per cent., its distributed profits taxed at 40 per cent., plus withholding tax of 41¼ per cent., pending negotiation of double taxation relief agreements with the various countries concerned.
As I understand the position, after the negotiation of agreements, the standard rate of withholding tax will be replaced by a new proper withholding tax at a lower level. I wanted to ask the Government if they could give some intimation of what this will be. My information is that it certainly will not be less than

15 per cent., is not likely to be more than 30 per cent., and that most people expect it to be round about 25 per cent. But whatever happens, the overseas investor is likely to be deterred by the fact that his dividend, even if he claims back withholding tax, will have suffered the irreducible minimum of 40 per cent. tax.
Of course, if withholding tax is as high as 25 per cent., or is anything above 16¼ per cent., the United Kingdom balance of payments will benefit from the fact that the Treasury is taking a bigger slice of the gross dividend payable to foreign shareholders, but in considering the balance of payments aspect of this one has got to consider the fact that this aspect is certain to be more than outweighed by the lower attractiveness, the diminishing attractiveness, of portfolio investment in Britain and the consequent effect on the balance of payments.
We have been considering the impact of the new arrangements for Corporation Tax on the balance of payments. Therefore, I think it is important that the Committee should hear something on this subject, which is highly relevant to the general effect the new scheme of Corporation Tax will have.

Mr. MacDermot: The right hon. Gentleman has had the advantage of having occupied my post before me, and I am sure he will be the first to realise the awkwardness of the situation in which he has placed me by asking me to elaborate to the Committee upon the intentions of the Government in a matter which is the subject of negotiations, some of which have already commenced, others of which will have to be undertaken. He has set out very fairly what are the balancing considerations which we shall have to have regard to. In this, as in many other other matters, one has got to weigh up


what may seem immediate short-term advantages against longer-term advantages to be gained from a different course. I am afraid that I cannot respond to his invitation in any way by suggesting any figures, because, of course, these would be relevant to our negotiating position. All I can say is teat the considerations to which he has alluded are very present to our minds, and we hope that we shall be able to negotiate satisfactory agreements with the other countries concerned, beginning—and perhaps most important, of course—with the United States of America.

Sir E. Boyle: And negotiating very carefully with our partners in O.E.C.D., which is of very great importance?

Mr. MacDermot: I quite agree. I think that for reasons which will be obvious, perhaps, the first one we must Live attention to is that with the United States, but, of course, the O.E.C.D. ones will be of great importance, too, and these, we hope, will follow quickly.

12.15 a.m.

Mr. Maxwell-Hyslop: There are two points that I wish to raise on this Clause. First, I think it will be common to both sides of the Committee that there is not by any means catholic knowledge of the contents of the Bill, and even less is there an understanding of the taxation laws of foreign countries. This puts British firms which wish to open subsidiary companies in foreign countries in the difficult position of having to master not only British tax law, but also, for example, Brazilian tax law, because unless and until both have been mastered, they are unable to ascertain what will be the net return which they are likely to be able to give to their shareholders for the capital investment concerned. This adds a great additional hazard to those companies which wish to invest abroad, and it is an additional reason why extra relief should be given, rather an extra discouragement.
During the debate yesterday, and for a few minutes today, one class of subsidiary company abroad did not receive the attention which is due to it. There are a number of industries in this country which can sell abroad extensively only if they set up service organisations in customer countries. In many cases these service organisations will not show any

significant working profit, at any rate for a number of years, on their own operations, but, as experience has shown, it is essential to set them up if one is to compete effectively against very intense American competition.
I am thinking particularly of the aircraft industry where, because of the large capital sums involved, it is essential that the aircraft and their engines should be out of commission for the minimum possible time for servicing and overhaul. Experience has shown that it is often necessary to set up subsidiary companies abroad, not so much to handle sales, as to handle the servicing and overhaul of these products once they have been exported.
This is very often an extremely risky undertaking commercially. It is risky because, having set up an overhaul base, there is nothing to prevent large airline customers themselves then undertaking the overhaul of those engines or aircraft, and leaving the subsidiary company owning a large plant for which there is inadequate, or indeed no, throughput. This is not hypothetical. It has happened in a number of cases, and British firms which have struggled hard to break into and retain this export market have been left with burnt fingers as a result. I therefore urge the Financial Secretary to realise that it is inadequate merely to look at the profitability of the projected company, or of an existing company, when weighing the merits of the Clause. The total effect on the British export effort must be considered.
When I say that it must be considered, I should add that it is much easier to consider it, than to evaluate it. It is very difficult to prove, after a series of sales have been made, that they would not have been made had it not been for the servicing facilities which were set up concommitantly with them; and yet people who have had experience of trying to export in this very competitive market know that unless these facilities are provided, sales will not be made. Moreover, when these facilities are provided, it is necessary to ensure that they continue to be used, and the only effective way of doing that is to involve local capital in them, rather than have them as wholly-owned subsidiaries.
This presents such extremely complex problems for the companies concerned


in estimating what scale of investment, if any, is justified, that to add additional hazards of domestic tax by means of legislation in the form of this Clause is likely to result in firms deciding against this type of enterprise, not only to the

long-term, but also to the short-term disadvantage of our balance of payments.

Question put, That the Clause stand part of the Bill.

The Committee divided: Ayes 152, Noes 141.

Division No. 180.]
AYES
[12.19 a.m.


Allaun, Frank (Salford, E.)
Garrett, W. E.
Miller, Dr. M. S.


Alldritt, Walter
Garrow, A.
Morris, Alfred (Wythenshawe)


Allen, Scholefield (Crewe)
George, Lady Megan Lloyd
Mulley, Rt. Hn. Frederick (SheffieldPk)


Armstrong, Ernest
Gourlay, Harry
Murray, Albert


Atkinson, Norman
Gregory, Arnold
Norwood, Christopher


Baxter, William
Grey, Charles
O'Malley, Brian


Bence, Cyril
Griffiths, Will (M'chester, Exchange)
Oram, Albert E. (E. Ham, S.)


Benn, Rt. Hn. Anthony Wedgwood
Hamilton, James (Bothwell)
Orbach, Maurice


Bennett, J. (Glasgow, Bridgeton)
Hamilton, William (West Fife)
Paget, R. T.


Binns, John
Hamling, William (Woolwich, W.)
Palmer, Arthur


Bishop, E. S.
Hannan, William
Pannell, Rt. Hn. Charles


Blenkinsop, Arthur
Hattersley, Roy
Parker, John


Boston, T. G.
Hazell, Bert
Parkin, B. T.


Bradley, Tom
Heffer, Eric S.
Pentland, Norman


Bray, Dr. Jeremy
Herbison, Rt. Hn. Margaret
Prentice, R. E.


Brown, Hugh D. (Glasgow, Provan)
Hobden, Dennis (Brighton, K'town)
Pursey, Cmdr. Harry


Brown, R. W. (Shoreditch amp; Fbury)
Holman, Percy
Rees, Merlyn


Buchan, Norman (Renfrewshire, W.)
Horner, John
Reynolds, C. W.


Buchanan, Richard
Howie, W.
Richard, Ivor


Butler, Herbert (Hackney, C.)
Hughes, Emrys (S. Ayrshire)
Robertson, John (Paisley)


Butler, Mrs. Joyce (Wood Green)
Irving, Sydney (Dartford)
Sheldon, Robert


Callaghan, Rt. Hn. James
Jeger, Mrs. Lena (H'b'namp;St. P'cras, S.)
Shore, Peter (Stepney)


Carmichael, Neil
Jenkins, Hugh (Putney)
Short,Rt. Hn. E. (N'c'tle-on-Tyne,C.)


Coleman, Donald
Johnson, Carol (Lewisham, S.)
SilKin, John (Deptford)


Conlan, Bernard
Johnson, james (K'ston-on-Hull, W.)
Silverman, Julius (Aston)


Corbet, Mrs. Freda
Jones, J. Idwal (Wrexham)
Skeffington, Arthur


Crawshaw, Richard
Jones, T. W. (Merioneth)
Slater, Mrs. Harriet (Stoke, N.)


Crosland, Rt. Hn. Anthony
Kelley, Richard
Small, William


Cullen, Mrs. Alice
Kerr, Mrs. Anne (R'ter amp; Chatham)
Snow, Julian


Dalyell, Tam
Lawson, George
Steele, Thomas (Dunbartonshire, W.)


Davies, G. Elfed (Rhondda, E.)
Ledger, Ron
Strauss, Rt. Hn. G. R. (Vauxhall)


Davies, Ifor (Gower)
Lee, Rt. Hn. Frederick (Newton)
Thomson, George (Dundee, E.)


Dell, Edmund
Lever, Harold (Cheetham)
Tuck, Raphael


Diamond, John
Lipton, Marcus
Varley, Eric G.


Dodds, Norman
Loughlin, Charles
Wainwright, Edwin


Doig, Peter
Mabon, Dr. J. Dickson
Walden, Brian (All Saints)


Driberg, Tom
McBride, Neil
Wallace, George


Duffy, Dr. A. E. P.
MacDermot, Niall
Watkins, Tudor


Dunn, James A.
McGuire, Michael
Weitzman, David


Dunnett, Jack
Mclnnes, James
Wells, William (Walsall, N.)


Edelman, Maurice
Mackenzie, Gregor (Rutherglen)
Whitlock, William


Edwards, Robert (Bilston)
Mackie, John (Enfield, E.)
Wilkins, W. A.


English, Michael
MacMillan, Malcolm
Williams, Mrs. Shirley (Hitchin)


Evans, Albert (Islington, S.W.)
Mahon, Peter (Preston, S.)
Woodburn, Rt. Hn. A.


Fitch, Alan (Wigan)
Mahon, Simon (Bootle)
Woof, Robert


Fletcher, Sir Eric (Islington, E.)
Manuel, Archie
Wyatt, Woodrow


Fletcher, Raymond (Iikeston)
Mapp, Charles
Yates, Victor (Ladywood)


Floud, Bernard
Mason, Roy
Zilliacus, K.


Foley, Maurice
Maxwell, Robert



Foot, Michael (Ebbw Vale)
Mayhew, Christopher
TELLERS FOR THE NOES:


Fraser, Rt. Hn. Tom (Hamilton)
Mellish, Robert
Mr. John McCann and


Freeson, Reginald
Mendelson, J. J.
Mr. Joseph Harper.




NOES


Agnew, Commander Sir Peter
Black, Sir Cyril
Clark, William (Nottingham, S.)


Alison, Michael (Barkston Ash)
Blaker, Peter
Cordle, John


Allan, Robert (Paddington, S.)
Box, Donald
Corfield, F. V.


Allason, James (Hemel Hempstead)
Boyle, Rt. Hn. Sir Edward
Crowder, F. P.


Anstruther-Gray, Rt. Hn. Sir W.
Brinton, Sir Tatton
Curran, Charles


Awdry, Daniel
Brown, Sir Edward (Bath)
Dalkeith, Earl of


Baker, W. H. K.
Bruce-Gardyne, J.
Davies, Dr. Wyndham (Perry Barr)


Barber, Rt. Hon. Anthony
Buck, Antony
Dean, Paul


Barlow, Sir John
Buxton, Ronald
Deedes, Rt. Hn. W. F.


Batsford, Brian
Carlisle, Mark
Eden, Sir John


Bell, Ronald
Carr, Rt. Hn. Robert
Elliott, R. W. (N'c'tle-upon-Tyne,N.)


Berry, Hn. Anthony
Channon, H. P. G.
Emery, Peter


Bingham, R. M.
Chataway, Christopher
Errington, Sir Eric


Birch, Rt. Hn. Nigel
Chichester-Clark, R.
Eyre, Reginald




Fell, Anthony
Kirk, Peter
Prior, J. M. L.


Fletchcr-Cooke, Charles (Darwen)
Lancaster, Col. C. G.
Pym, Francis


Fraser, Rt. Hn. Hugh (st'fford amp; Stone)
Langford-Holt, Sir John
Redmayne, Rt. Hn. Sir Martin


Fraser, Ian (Plymouth, Sutton)
Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)
Ridley, Hn. Nicholas


Gilmour, Ian (Norfolk, Central)
Longbottom, Charles
Ridsdale, Julian


Gilmour, Sir John (East Fife)
Longden, Gilbert
Roberts, Sir Peter (Heeley)


Glover, Sir Douglas
Lubbock, Eric
Roots, William


Glyn, Sir Richard
MacArthur, Ian
Scott-Hopkins, James


Goodhew, Victor
Mackie, George Y. (C'ness amp; S'land)
Sharples, Richard


Grant, Anthony
McLaren, Martin
Shepherd, William


Grant-Ferris, R.
Maclean, Sir Fitzroy
Sinclair, Sir George


Gresham Cooke, R.
Macleod, Rt. Hn. Iain
Steel, David (Roxburgh)


Grieve, Percy
Marples, Rt. Hn. Ernest
Studholme, Sir Henry


Griffiths, Peter (Smethwick)
Mathew, Robert
Summers, Sir Spencer


Grimond, Rt. Hn. J.
Maude, Angus
Talbot, John E.


Hall, John (Wycombe)
Mawby, Ray
Taylor, Edward M. (G'gow, Catheart)


Hall-Davis, A. G. F.
Maxwell-Hyslop, R. J.
Taylor, Frank (Moss Side)


Hamilton, Marquess of (Fermanagh)
Maydon, Lt.-Cmdr. S. L. C.
Thorpe, Jeremy


Harvey, John (Walthamstow, E.)
Mitchell, David
Turton, Rt. Hn. R. H.


Hastings, Stephen
Monro, Hector
van Straubenzee, W. R.


Hawkins, Paul
Morrison, Charles (Devizes)
Walder, David (High Peak)


Heald, Rt. Hn. Sir Lionel
Mott-Radclyffe, Sir Charles
Walker, Peter (Worcester)


Heath, Rt. Hn. Edward
Munro-Lucas-Tooth, Sir Hugh
Ward, Dame Irene


Hendry, Forbes
Murton, Oscar
Webster, David


Higgins, Terence L.
Neave, Airey
Whitelaw, William


Hirst, Geoffrey
Noble, Rt. Hn. Michael
Wilson, Geoffrey (Truro)


Hobson, Rt. Hn. Sir John
Onslow, Cranley
Wise, A. R.


Hordern, Peter
Osborn, John (Hallam)
Yates, William (The Wrekin)


Hornby, Richard
Page, R. Graham (Crosby)
Younger, Hn. George


Hunt, John (Bromley)
Peel, John



Jenkin, Patrick (Woodford)
Percival, Ian



Johnston, Russell (Inverness)
Peyton, John
TELLERS FOR THE NOES:


Kerr, Sir Hamilton (Cambridge)
Pounder, Rafton
Mr. Jasper More and


Kershaw, Anthony
Powell, Rt. Hn. J. Enoch
Mr. Dudley Smith.


King, Evelyn (Dorset, S.)
Price, David (Eastleigh)

Clause 61.—(DIVIDEND STRIPPING, AND BOND WASHING.)

12.30 a.m.

Sir Henry d'Avigdor-Goldsmid: I beg to move Amendment No. 558, in page 77, line 1, to leave out from "dealer" to "for" in line 4.

The Temporary Chairman (Mr. H. Hynd): It is suggested that with this Amendment we might take Amendment No. 559, in page 77, line 23, leave out subsection (6) and insert:
(6) If the recipient is a company, any election made under section 44(3) of this Act shall not apply to the relevant distribution".

Sir H. d'Avigdor-Goldsmid: With this Clause we now depart from the broad uplands of national policy where we have seen pioneers struggling in the face of all climatic difficulties to earn profits to inure to the benefit of the country, to what might be called the crooked streets where devious transactions take place. I notice that the Clause bears the emotive rubric of "Dividend stripping, and bond washing", so I am not at all surprised that most right hon. and hon. Gentlemen have averted their faces from the horrid spectacle of these distasteful activities. Nevertheless, it falls within the purview of the Committee to look at all the Clauses in the. Finance Bill, even if they deal

with features of our financial life of which we disapprove, and although the time is perhaps not the most favourable, they deserve as close a scrutiny as possible.
The main purpose of the Clause is to translate into terms of Corporation Tax and Profits Tax enactments previously appearing on the Statute Book in terms of Income Tax only. Although I should like to refer to that aspect on the Question that the Clause stand part, I should now like to put to the Government one or two points that seem to me to arise in this context.
The Clause basically deals with the use made by avaricious people of exaggerated dividends which they have been able to pay out of accumulated and already taxed reserves. This was a type of transaction that I think was effectively stopped by the 1960 Act, but it might make what I have just said a little clearer if I explained what the transaction consisted of in a case that came within my cognizance.
This was the case of an overseas telephone company whose charter had come to an end and which therefore had nothing to do, but had accumulated a certain amount of taxed reserves, instead of going into liquidation which would, perhaps, have been the normal course, an institution thought that it could


use the assets to good purpose, so whereas the company had about £600,000 of reserves on which tax had been paid and total assets of about £650,000, the original shareholders were made an offer of something over £700,000, for which sum they were pleased to pant with their shares. The purchasers of the company declared a special dividend of £600,000 free of tax.
This free tax provision made a very great appeal to pension funds and other funds which were in a position to reclaim Income Tax which had been deducted; a dividend which had cost the company £600,000 was, in the hands of such a recipient, worth nearly £1 million, being grossed up for Income Tax. The net result was that the promoters of the transaction bought for £700,000 something which they were able to sell for between £850,000 and £900,000, taking advantage of the fact that the ultimate buyers were in a position to reclaim Income Tax which had been paid by the company many years before.
We discussed this fully in 1960 and there is no earthly point in bringing it all up again because no one in his senses would say that either side of the Committee would favour such transactions. I want to draw attention to the present position under Clause 61 in respect of such transactions. The Clause provides that the distribution by a subsidiary company in respect of profits accumulated before April, 1965, and exceeding the ordinary profits of the company shall be taxed in the following way: Under subsection (6) of Clause 61, that payment by the subsidiary company to the parent company cannot be made in gross terms. It has to be subject to Income Tax. When this is received by the parent company, under subsection (3), it is treated as capital receipt and is then subject to Capital Gains Tax. If the parent company then seeks to distribute this amount to its shareholders it has also to make a further deduction of Income Tax.
The net result is that tax is paid three times. So, taking that notional figure of £100,000 of accumulated earnings in the subsidiary company, there would be taxation at the Income Tax rate before paying it over to the parent company. That is £100,000 minus £41,000, which

is £59,000. The £59,000 in the hands of the parent company would bear Capital Gains Tax at 40 per cent. That leaves £35,000. £35,000, if distributed to shareholders of the parent company, would bear Income Tax again at 41 per cent., leaving a net sum of £20,000 distributed.
The Amendment I have put down is drawn so as to avoid double payment of Income Tax in transactions of this kind. None of us would wish to argue that Income Tax and Capital Gains Tax should not both be paid. But I do not see why Income Tax should be charged twice. If the Chancellor does not mean to make an improper gain at the expense of the general body of taxpayers it has been done in complete innocence.
In the legislation of 1960 we have made it impossible for such transactions to be carried out to the detriment of the general body of taxpayers. Therefore, in moving this Amendment, I put it to the right hon. Gentleman that justification for paying Income Tax twice does not seem to be clear and it does not seem to follow the previous legislation which this Clause embodies.

Mr. Diamond: I followed very carefully what the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) had to say. I am sure that he was relating it to the Amendment, and I am sure that his Amendment, although he did not explain quite why or how, sought in some way or other to remedy the defect to which he referred. Therefore, I really have to deal with the matter in two parts, first with his speech and secondly with the Amendment, because it is, after all, on the Order Paper, even though it was not strongly argued.
As to the hon. Member's speech, I am at the service of the Committee as long as hon. Members like to talk about dividend stripping, but as it is somewhat of a technical matter I can perhaps reassure the hon. Member by saying that his anxieties are without foundation. As he rightly said, what the general framework of the Clause does is to introduce into Corporation Tax as nearly as may be exactly the existing provisions with regard to dividend stripping for tax purposes—that is all it does—and it uses terms instead of legislation by reference—which is the normal pattern in this part of the Bill—which would be too complicated in


these technical provisions. With exceptions which are, technically, extremely minor ones, it merely reintroduces the existing provisions for dividend stripping.
The Amendment would have the effect of reopening the door to dividend stripping by non-dealing companies. I would not wish to spend a great deal of time on this because the hon. Gentleman did not say that this was his purpose. It is the effect of the Amendment. I am sure that it is not his purpose, and I am sure that it is not the purpose of the Committee. Therefore, perhaps I could just leave it at that, explaining that in those circumstances I could not possibly recommend the Committee to accept the Amendment.
However, Mr. Hynd, if it is your wish to take the decision of the Committee on Amendment No. 559, and in order to put the hon. Gentleman in a happy and satisfied frame of mind, I would say that that is an Amendment—to which, again, the hon. Gentleman did not speak at any great length—which on balance puts the position more simply than the Bill does, and we shall be glad to accept it.

Amendment negatived.

Amendment made: In page 77, line 23, leave out subsection (6) and insert:
(6) If the recipient is a company, any election made under section 44(3) of this Act shall not apply to the relevant distribution".—[Sir H. d'Avigdor-Goldsmid.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Sir H. d'Avigdor-Goldsmid: As has been made abundantly clear, this is a Clause full of complications. Therefore, I should like to put very simply and clearly to the right hon. Gentleman the point that I want to make, which is that the Chancellor has been perfectly fair in everything that he has done in that he has said that there is no element of retrospection in the legislation in front of us. I tabled an Amendment which was not selected, and, therefore, it would not be appropriate for me to refer to it, but the effect of it was that I wanted to get in language intelligible to the Inland Revenue that this element of retrospection did not exist. What is said across the Floor of the House does not always carry the same weight if it is not actually embodied in the Statute—

12.45 a.m.

The Temporary Chairman: Order. Perhaps the hon. Gentleman can make his point in some other way. He must now discuss only what is in the Clause.

Sir H. d'Avigdor-Goldsmid: In dealing with this Clause, I would be grateful if the right hon. Gentleman would confirm that it does exactly what he said, namely, that it translates into terms of Corporation Tax what is in the existing legislation.
There are certain subtle changes in language in this Clause compared with previous legislation. For instance, in subsection (1,a) the expression
an ingredient in a holding
is a new phrase so far as I am advised. It is defined in Paragraph 3 of the Schedule, so perhaps I should not touch on that as we shall come to the Schedule later.
Again in subsection (5) the words
for any trust or fund
are new. I do not think they have appeared in previous legislation. Subsection (8) sets out the rules regarding normal dividends somewhat differently.
These are complicated and extremely technical matters. As the right hon. Gentleman fully appreciates, I am quite unqualified to deal with them, but I should like to have official confirmation that these do not by the back door introduce into our legislation any new principle.

Mr. Diamond: I am only too glad to give that confirmation because, as the hon. Gentleman says with force, what any one of us says in this Committee is what is written in HANSARD and not what is written in the Bill. What the courts have to decide upon is what is written in the Bill and only what is in the Bill.
I do not know how I can help the hon. Gentleman further, except by saying that there is only one possible subsection about which he may possibly have the slightest anxiety with regard to retrospection, and that is subsection (1) which refers to holdings acquired in or after 1960–61. That follows precisely Section 31 of the Finance Act, 1960. The point, as I am sure the hon. Gentleman will remember, is that in the original dividend stripping the Revenue was protected against operators who acquired companies and who stripped the dividend at any


time within six years. That brought us up to 1961, as it were.
Then the matter came before the House again in 1960 and was re-enacted on the basis that those who had acquired shares and who were waiting to strip the dividend after the six-year period were not going to have the benefit of stripping the dividend even after six years and so putting their hands into the till of the Revenue, which is all that this operation amounts to. The present legislation simply adopts the situation and merely converts from Income Tax terms to Corporation Tax terms.
I assure the hon. Gentleman that I have looked into this question of retrospection because it has been raised on the hon. Gentleman's unmentionable Amendment. I can assure him, therefore, that as far as I am able to say and, I am sure he will understand, as honestly as I can, I do not think there is anything of that aspect about which he need have the slightest anxiety.

Mr. William Clark: I am sure that nobody wants to reopen a loophole which was effectively closed in 1960. We are grateful for the fact that again the Government have given way on the initiative of my hon. Friends in trying to improve the Bill.
I should like the Chief Secretary to explain the words in subsection (1,c)
otherwise than wholly out of profits arising to the company since that time".
What is the difference between that wording and the wording "since date of acquisition"? I am advised that there is some ambiguity about this, and I should be grateful if the right hon. Gentleman would clear it up. As has been said, it is not what is said in the Committee stage that affects court decisions on tax matters; it is what is written in the Bill. If the right hon. Gentleman cannot give an answer now, perhaps he will undertake to look at this point between now and Report. If the wording should be "since date of acquisition" perhaps he will table a suitable Amendment to avoid retrospection.

Mr. Diamond: I am able to deal with that point now, because the hon. Gentleman did, in a sense, give me warning about this matter, again in an unmentionable way. The possible ambiguity in

the hon. Gentleman's mind refers to the word "time". The question is whether it refers to a period or a point of time. In subsection (1,b) a definite point of time is mentioned. Therefore, I am advised that the words in paragraph (c) can refer only to a point of time and not the period of time referred to in the earlier provision.
I am advised that this is capable of only one interpretation, but the intention I am ascribing to this subsection is confirmed by the Schedule, which uses the phrase
as made out of profits arising to the company since the time when the holding was acquired".
That meets the hon. Gentleman's point completely. Having looked into the matter in advance, I can, I think, satisfy the hon. Gentleman now that his anxiety is not well founded.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 62.—(LOCAL AUTHORITIES.)

Mr. R. W. Elliott: I beg to move Amendment No. 454, in page 78, line 27, after "authority" to insert:
and a statutory water undertaker".

The Temporary Chairman: We can discuss at the same time Amendment No. 455, in page 78, line 27, after "shall" insert "each";
Amendment No. 457, page 78, line 29, after "income" insert:
(but subject to subsections (5) of this section)";
Amendment No. 458, in page 78, line 30, after "and" insert "subject as aforesaid neither";
Amendment No. 459, in page 78, line 30, leave out "not";
Amendment No. 460, in page 79, line 20, at end add:
(5) Nothing in this section shall exempt a statutory water undertaker from liability to tax under section 43 of this Act.
(6) For the purposes of this section "statutory water undertaker" means any body corporate (other than a local authority) incorporated by private Act of Parliament and carrying on a water undertaking (including an undertaking for the supply of water in bulk).

Mr. Elliott: The purpose of this Amendment is to safeguard the interests of water consumers in areas supplied by statutory water companies by giving to those companies the same treatment as regards Corporation Tax as is to be given to water undertakings operated by local authorities and joint boards.
There are three types of statutory water undertakers. First, there are local authorities operating individually; secondly, there are local authorities combined to form joint boards; and, thirdly, there are statutory water companies.
There is, however, a fourth category on which I should appreciate a little enlightenment from the Chief Secretary. Although Clause 62 makes quite clear the position of the local authority water undertaker in that such an undertaker will not be subject to Corporation Tax, and makes just as clear that the statutory water company will be subject to Corporation Tax, there is a fourth category of water undertaker, usually called a joint water authority, which includes local authorities and water companies. An example is the Coquet Water Board in Northumberland. Are such joint concerns to be subject to Corporation Tax or not?
I will principally refer to statutory water companies. They now supply about one-fifth of the population of England and Wales. They are, by any test which can be applied to them, among the most efficient undertakings in the country. Since 1956 the Ministry of Housing and Local Government has actively encouraged the amalgamation of water undertakings throughout the country, and it should be emphasised that this policy has at all times had the full support of the water industry and has, in consequence, been highly successful. The number of undertakings has been reduced from 1,186 in 1945 to less than 400 today.
The criterion which is adopted in amalgamations—and this is particularly important in terms of the Amendment—is, and has been, efficiency, irrespective of the type of undertaking. The most efficient undertaking has in all cases been accepted by both sides, local authorities and companies, as the nucleus. In some cases companies have taken over local authority undertakings and in others the reverse has taken place. Small under-

takings have been eliminated and the number of companies is now 40.
The all-important point which I wish to make in moving the Amendment is that those companies which have survived have done so because they have been regarded as the most efficient organisations to supply water in the areas concerned. That has certainly been the case in my area of Newcastle-upon-Tyne, in Sunderland and in South Shields in the north-east of England. Statutory water undertakings are, unfortunately, usually misunderstood by the general public in that there is a prevalent misconception that they are private companies exploiting a natural element for profit. This is just not so. They are very different from ordinary commercial concerns and they render an essential service for a strictly limited return on the invested capital.
It is necessary and desirable, in seeking the addition of exemption from Corporation Tax of statutory water companies, to emphasise the statutory controls to which these companies are subject. First, there are limitations on their charges for domestic supplies. Secondly, their rates of dividend are fixed at a minimum. Before the war the maximum on ordinary capital was 5 per cent. and even now it is only 7 per cent. When we think of some of the earlier discussion we had on the Bill we see that this is certainly not a rate to attract speculators. Thirdly, when additional share capital needs to be raised, it must be raised by tender to ensure that the best price available in the market is obtained. Fourthly, the maximum and annual amounts that can be allocated—

Mr. Diamond: Before the hon. Gentleman proceeds, would he say, since he is referring to the maximum rate of interest on capital, what is the maximum rate of interest on borrowed money, loan capital?

Mr. Elliott: I am not certain but I believe it is 7 per cent.

Mr. W. F. Deedes: It is 7 per cent.

Mr. Elliott: My right hon. Friend informs me that it is 7 per cent.
As I was saying, the maximum and annual amounts which can be allocated


for reserve and contingency funds are restricted, as are the amounts for carry forward, and any surpluses must be devoted to reducing water charges. Because of these statutory controls, any increase in taxation of the statutory water companies must eventually mean an increase in charges, since there are no other resources available to meet it.
During the past decade and more, there has been a tremendous increase in the public demand for water in this country, and the water companies have had an enormous capital expenditure programme. The pre-Bill basis of taxation for statutory water companies has encouraged them to raise the necessary capital in the form of ordinary and preference capital, the capital allowances on this further capital expenditure having meant a servicing cost to the consumer on the additional capital of little more than the net dividends on ordinary and preference capital, as compared with the possible alternative of gross interest on borrowed money, such as mortgages and debentures. This has come about because, whereas the companies had to pay tax deducted from interest paid under Section 170 of the Income Tax Act, 1952, capital allowances could be set against the profit out of which dividends on ordinary and preference capital were paid. The result has been that a substantial proportion of the tax deducted from dividends was retained by the companies, and it is my submission that this has been largely responsible for keeping charges to the consumer low.
But this capital policy enabling costs to be kept down will no longer be to the companies' advantage under the Corporation Tax proposals because, although it is proposed that borrowed money will be allowed as a charge before arriving at Corporation Tax, dividends on ordinary and preference capital will not only be subject to Income Tax on distributions under the new Schedule F but they will also be payable out of profits subject to the full rate of Corporation Tax. The highly unfair consequence will be that water consumers supplied by statutory companies will automatically face increased charges under the Clause as it stands.
I appeal to the Chief Secretary to give this matter his earnest consideration. By

accepting the Amendment, the Government will do no more than place the statutory board in the same taxation position as the local authority undertaking, and I urge them to do this in the name of justice.

1.0 a.m.

Mr. Deedes: These Amendments are designed to cover a singular situation. The industry which we are discussing is uniquely represented by this curious trio of the statutory companies, the local authorities and the joint boards. I can think of no parallel to this sort of arrangement. In terms of what has been our general water policy, it has been the practice to give all three equal esteem and treatment, and I think that this policy has obtained right from the days immediately after the war when Mr. Aneurin Bevan took the first action designed to bring water undertakings to the sort of shape we are moving towards now.
As far as I know, there has never been any difference on this score. It has always been agreed that these three separate types of bodies should be given parity of esteem and treatment. As a result, we still have about 40 companies remaining, and they have expanded rather than otherwise in following the process described by my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott). I claim an interest here. I have a water undertaking in my constituency, the Mid-Kent Company, with about 300,000 customers and covering an area of about 800 square miles. It has gone ahead and absorbed a number of water undertakings.
I would mention here that companies operate within defined limits. There are still very important limits in the supply of water. They cannot be regarded as commercial companies for reasons of the restrictions imposed upon their charges, rate of dividends and allocation of reserve and contingency funds.
For this reason we believe that this Clause must indirectly lead to an increased charge to the consumer. In the case of the Mid-Kent Company, this would mean something like 15 per cent. over the next 15 wonths, and probably a great deal more in the following year. I would submit to the Chief Secretary that, no doubt unwittingly, this is contrary to the policy which we pursued in


respect of water undertakings over a great many years, and it is for this reason that I support the Amendment.

Mr. Webster: I rise to support this Amendment. The Bristol Water Works Company has a maximum interest rate of 7 per cent. In case the Chief Secretary should suggest that the return should be greater than this, I would point out that since the Bill was published the rate of interest would be 8· per cent. because the price of the 7 per cent. maximum stock has now gone down to about 91 per cent. This bears out what my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) said so eloquently in moving this Amendment. There is a great reluctance today to buy stocks in these companies, and it is a very serious matter. A Morton's Fork is hanging over them which limits the maximum interest they can pay. The maximum interest of any company quoted on the Stock Exchange is the Felixstowe Company with 7½ per cent., but I do not think this is a statutory company. For a statutory company the maximum rate is 7 per cent. As my hon. Friend has said, this limits the amount which can now be paid out to shareholders. There is no question of speculation here.
The only thing that will happen if the companies are to raise their extra money is that it will have to be at greater expense, because there will have to be lower tender prices or else, and probably also, it will mean that people will have to pay a higher rate, although that also is in many cases tied to the rating of the hereditaments in which they live.
In my constituency we have the case of the precept raised in the water rate because my local undertaking, the Weston-super-Mare undertaking, was taken over some years ago. At that time the Bristol Corporation was the water works undertaking and it was extremely worried and undertook, in effect, to subsidise the water rate it was charging people in my constituency. As we all know, no one is grateful for a subsidy. It so happens that when the rating reassessment came through several years ago the subsidy ran out in Weston-super-Mare. This was a double blow and my post bag was extremely full on this point.
In addition to this, we had the embarrassment that the Bristol Water Works

Company decided to build very fine new offices on the main road into my constituency, which was noted by my constituents who thought that the directors were building themselves fine premises. I know that the undertaking is of the highest order and one of the most efficient and nothing dishonourable was done.
In the years ahead we shall move very rapidly into a period of acute water shortage. When we eventually get back to power there will be a very intensive industrial expansion which will require tremendous supplies of water. We regularly have Bills dealing with water for Manchester, and we know that the problem of water supply is increasing for local authorities and that there may be a time for a national approach that will require maximum expenditure.
If nothing is done to alleviate this provision, it means that water undertakings will have to raise their money by very high percentage tenders or that the consumer will have to pay very much more than now. What my hon. Friend asks is very reasonable, and I am sure that the Chief Secretary will accede to it without the necessity of a Division.

Mr. John M. Temple: I am sure that the Committee is obliged to my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) for moving this Amendment. He brought it before us in an exemplary manner and did not overstate his case. I only want to add a few points of some complexity, because I believe that this is not a simple matter.
The main point of the Amendment, is to put statutory water companies in the same position as other statutory water undertakers, and if the Amendment is not accepted then statutory water undertakers will be in a position in which they will have to put up their charges very considerably while others will not have to do so. Therefore, private enterprise water undertakings will be penalised, together with their consumers, because of the taxation being imposed by the Government. I wonder sometimes how much co-operation there is between the Chief Secretary and the Secretary of State for Economic Affairs. The latter is always urging that prices be kept steady while the


Treasury Ministers are continually, through their taxation policies, putting prices up. My hon. Friend mentioned that there were four types of statutory water undertakers. I submit that there are five.

Mr. Diamond: Mr. Diamond indicated assent.

Mr. Temple: A new type of statutory water undertaker has appeared under the Water Resources Act, 1963. That being so, then a very strange position has arisen. Under that Act, the river authorities are deemed to be local authorities and, because they are capable of levying a precept, they are put in the special position of being able to be exempted from Capital Gains Tax and also, under this Clause, from Income Tax as well.
Perhaps I can look forward to a later Amendment, the effect of which would be nullified with regard to statutory water undertakers if this Amendment were accepted. Indeed, all local authorities would be exempted from Capital Gains Tax as well. The strange position with regard to river authorities is that their water conservation functions are not to be financed through precept at all they are to be financed by water charges. Thus we shall have statutory water undertakings—the river authorities—just because some part of their services are financed by precept, in the most favoured position with regard to water conservation functions because, in this Clause, the Government have taken the definition of a local authority to be a local authority as defined in the 1875 Act.
I believe that this in itself is a strange position, and I would like the right hon. Gentleman to comment particularly on the inclusion of the water conservation functions of the river authorities within the ambit of this Clause. This is a matter of some substance because it will be within the knowledge of most hon. Members that river authorities are to be the biggest water undertakers of the future. Their task is to construct impounding works in various parts of the country in order to be wholesale purveyors of water.
1.15 a.m.
It is right that they should have these advantages, but I can see no reason whatsoever why the statutory water undertakers, who also have to construct impounding works, should not be in

exactly the same position. As I have explained it is due to a strange series of chances that river authorities find themselves in this position in regard to their conservation functions.
I have been thinking a good deal about this Amendment and its effect with regard to Corporation Tax. If this Amendment is accepted it will give the advantages of a remit of Capital Gains Tax as well if the next Amendment, No. 561, which is in the name of the Government, is accepted by the Committee. I thought it wise to bring this forward at this juncture, Dr. King. If it be your wish that I should not pursue this matter, then I will not do so, but I think it is germane to my argument, and certainly the effect of accepting this Amendment would be to put statutory water undertakers in the position where they would be able to take advantage of the following Government Amendment.
I would draw the attention of the Chief Secretary to the position of statutory water undertakers with regard to Capital Gains Tax. The Chief Secretary will know from his experience of the extraordinary difficulty of valuing a statutory water undertaking. I have no need to go into the extremely difficult problem of cumulo values of water undertakings under which all the pipes and flumes under the ground, are valued as a part of that undertaking. This is the case, and unless this Amendment is accepted a statutory water undertaking is subject to Capital Gains Tax. If that is the case and a small part of a statutory water undertaking is either sold or compulsorily acquired, then in order to arrive at the rate of Capital Gains Tax on that particular small portion of the authority's premises, the whole cumulo value of the water undertaking will have to be valued. This would happen each time a small portion of the undertaking is taken away. I could hazard a guess that the valuation of the water undertaking would be a greater task and a greater cost to the community than the actual value of the land which was being acquired, because the complexities of a complete revaluation would be a most formidable task. It would be extremely wise of the Government, therefore, to accept this Amendment, the effect of which would be to exempt statutory water undertakings from the operation of the Capital Gains Tax.
My hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) mentioned the capital structure of water undertakings. He mentioned preference capital, and I would endorse the importance of preference capital, particularly under a Corporation Tax. I do not think I need go into this, because I think it is accepted on all sides that a company which has a large proportion of preference capital is penalised very severely under the Corporation Tax.
I was very surprised that the Chief Secretary asked my hon. Friend the Member for Newcastle-upon-Tyne, North, what the market rate of interest was on loan capital. This has nothing at all to do with the argument. Whatever the date of interest charged on loan capital, there will be no effect with regard to Corporation Tax. I would not say that in respect of Income Tax, because I do riot knew the position in respect of that, but certainly for Corporation Tax purposes this is true. The determining factor with regard to Corporation Tax is the amount of ordinary and preference capital, and this is the matter with which statutory water undertakings are particularly concerned.
Statutory water undertakings have a lot of perpetual preference stocks. As my right hon. Friend the Member for Ashford (Mr. Deedes) said, statutory water undertakers have a long and respected history, and their capital structures go tack almost into the mist of time, and that is why they have raised their capital in this form. I would submit that unless this Amendment is accepted they are going to be very severely penalised, and it is not in this case just the companies which will be severely penalised; it is all the people who are being supplied with water by the undertakings.
My hon. Friend the Member for Newcastle-upon-Tyne, North has estimated that the increase in water charges may be anything between 15 and 40 per cent., due to the proposals of the Government. I myself hope that this is not an operation of nationalisation by the back door. Frankly. I am extraordinarily suspicious about all the motives of the present Government, and unless they accept this Amendment I cannot but believe that what they are trying to do is to put statutory water companies in an almost

impossible position in which they will suffer so much criticism which should be applied to the present Government and not to themselves. I hope very much, therefore, that this Amendment will be accepted; otherwise I shall he extremely suspicious that private enterprise is being penalised and that, as I say, nationalisation by the back door is coming in.
I happen to have a statutory water undertaking in my own area, an extraordinarily efficient company, the Chester Water Works Company, which has been judged by successive Ministers as being extraordinarily efficient, and which was judged to be efficient enough to take over a local authority water undertaking. This is not an unique position, but a position which has not occurred very often.

Mr. Ridsdale: It has happened elsewhere, too. It has happened in my constituency with the Tendring Hundred Water Company.

Mr. Temple: It has happened in certain other parts of the country.
Just because the water undertaking of Chester Rural District Council has been taken over by the Chester Water Works Company the people in the area of Chester Rural District Council will not get the taxation advantages which are being offered in this Clause, but if that little undertaking had remained on its own and not grouped for efficiency purposes in a larger organisation then they would have got the advantages.
Are the Government going to say they prefer fragmentation, or do they prefer efficiency through larger organisations? Previous Ministers of Housing and Local Government have always taken the view that it was beneficial to the community to group water undertakings in order that they could be mutually self-sufficient, but the present Government, with these taxation proposals, are putting the clock back. It seems to me that if this Clause is put through in this form there will indeed be a case for splitting up once again the Chester water undertaking, and giving the original powers back to the District Council so that it can operate its own water undertaking. I challenge the Chief Secretary to say, if that were the case, that Chester Rural District Council water undertaking would not be in a better position than the Water Works Company.
This is, I believe, a major anomaly. I believe it can be put right by the Government's accepting these Amendments tonight. I can see no reason whatsoever why small water undertakings of local authorities which have been grouped should in effect be penalised, but that is what will be the effect of this Clause, unless our Amendments are acceded to. Frankly, by the number of letters I am getting from my own area at present, I can tell the Chief Secretary that the people of Chester are quite fed up with the enormous increases in prices going on at the present time.
This is just another increase in price which will be handed on to the consumers of water in these areas which are covered by statutory water undertakings. I hope very much, but I am not optimistic, that the Chief Secretary will accept the Amendments. If he had been thinking of accepting them, he would have leapt to his feet much earlier, but I hope that when I sit down he will leap to his feet and accept them, and by so doing give encouragement to those who live in areas covered by statutory water undertakings.

Mr. Ridsdale: I do not wish to make a long speech, because many of the technical points have been dealt with by my hon. Friend the Member for Newcastle-upon-Tyne. North (Mr. R. W. Elliott) and my hon. Friend the Member for the City of Chester (Mr. Temple).
I find myself in much the same position as my hon. Friend the Member for Chester, in that I, too, have in my division a private company which has taken over a local authority undertaking, and it may be that this game of box and cox will have to go on if this company is to take advantage of the Bill as it it at present drafted. I am most disturbed that the statutory companies are not to be given the same exemption as regards Corporation Tax as the local authority and joint boards.
I have one such company in my area, the Tendring Hundred Water Company, which looks after the water resources of the whole of my division. Does the Minister realise that at one fell swoop this Bill will increase its charges by between 20 per cent. and 25 per cent.?
Do the Government really intend to do this? Does the right hon. Gentleman realise the grave effect that this will have on the many retired people living in north-east Essex? I am sure that it is not the Minister's intention to do anything like this. At one moment we find the First Secretary appealing for stability in prices, and at the next moment we have the Chancellor increasing prices by, as my hon. Friend the Member for Newcastle-upon-Tyne, North said, anything between 15 per cent. and 40 per cent. For my authority the figure will be about 20 per cent. I am speaking moderately, but I should like to assure the Chief Secretary of my very strong feelings about this imposed increase in charges to people who cannot afford to bear any further increases because they are living on small pensions.
As my hon. Friend the Member for Newcastle-upon-Tyne, North said, these statutory companies are not run for profit. They are different from commercial concerns. They render an essential public service, for a strictly limited return on the invested capital, and by virtue of the statutory restrictions on dividends, reserves and surpluses, any increase in taxation imposed on them can be met only by increased charges to the water consumers.
I hope that the Chief Secretary has listened very carefully to the pleas which have been made by my hon. Friends. I hope the right hon. Gentleman will show he is a man of considerable sympathy for the retired people about whom I am concerned. I hope that he will not be hard or harsh on them, and that he will accept the Amendment.

1.30 a.m.

Mr. Lubbock: Having listened to the arguments, I am a little surprised that the Chief Secretary has not already accepted them.

Mr. Diamond: I do not regard that as a most encouraging remark. I have been trying to be courteous and listen to every hon. Member who has wanted to speak; otherwise I should have risen long ago. I shall remember it in future—especially as the hon. Member himself came to me yesterday, and he knows the conversation that took place, and what happened.

Mr. Lubbock: I do not mean to discourage the Chief Secretary from being accommodating in replying to the Amendment, but I would have thought that if he had had anything to say in reply to the arguments that have been put from this side of the Committee so far he would have intervened and not waited until several speeches had been made.
He knows the arguments about the water companies, and he could have risen before this. It is half-past one o'clock, and I do not suppose he wants to go on very late into the night any more than the rest of us—

The Chairman: Order. I shall be grateful if the hon. Member will come to the Amendment.

Mr. Lubbock: I am sorry, Dr. King. I was only taking up the point made by the Chief Secretary. I shall not pursue it in view of your Ruling. I do not wish to antagonise the Chief Secretary, but in my view the arguments that have been put from this side of the Committee are quite reasonable. I came into the debate without any great knowledge of the problems of water companies, and I have listened to the arguments with great care. There is much in what has been said, especially in the arguments put forward with respect to the increase in costs.
If it is true, as the hon. Member for the City of Chester (Mr. Temple) said, that increases in charges of about 15 per cent. will be imposed on the consumers of water—and the hon. Member for Harwich (Mr. Ridsdale) said that in his constituency the increase would be between 20 per cent. and 25 per cent.—it is a very serious matter. I agree with the hon. Member for Harwich that in considering this matter we must have regard to the pronouncements and policies enunciated by the First Secretary.
We must consider the effect that this will have in the areas where those increases are imposed, and what is likely to be the effect on the demands which the people who live in these areas will make in respect of wage and salary increases, and so on. If we want an incomes policy, it must start with prices. I agree with everything that the First Secretary has said. In a small way the Chief Secretary has an opportunity to set an example by accepting the Amendment to prevent unnecessary increases in prices.

Mr. Diamond: Mr. Diamond rose—

Mr. Lubbock: Does the right hon. Gentleman wish to speak?

Mr. Diamond: As the hon. Member was repeating what has already been said, and as he said that he came into the debate without a great deal of knowledge of the subject and was most anxious for me to reply to the debate, I misunderstood; I thought that he was resuming his seat.

Mr. Lubbock: I certainly was not resuming my seat. I have one or two things to underline. As far as I know there is no rule which prevents any Member who wishes to take part in the debate from doing so. This is the Committee stage of the Finance Bill, and I am told that anyone who wishes to raise points has every right to do so. I hope that the Chief Secretary is not going to produce some new doctrine designed to shut people up. I do not speak very often in the House, as you know, Dr. King. I may be excused for taking part in a debate on a subject which is of such great importance to many people.
These statutory water undertakings are in a position similar to that of local authorities. They have a public obligation. That distinguishes them from the other sort of company on whom Corporation Tax and Capital Gains Tax is being levied. They make no distribution. I understand that the whole of their capital is in the form of fixed interest stocks. These are either loan stocks or preference shares, and there is no way in which they can increase their distributions, or in which, on a winding-up, capital gains can be made by the persons who have invested in these undertakings.
There seems to be a very serious anomaly here. If a water undertaking is owned by a local authority it is not subject to either Corporation Tax or—if the next Government Amendment is accepted—Capital Gains Tax. The situation in another area may be precisely the same for the consumer who is getting water through a tap, but because the undertaking is a statutory water undertaking it will be liable to this taxation. Therefore, the charges will be greater in that area than in the area where the company is owned by the local authority.
I want to ask the right hon. Gentleman a question which is of some importance in my part of the world. I understand that under the previous Government it was the policy for the Greater London Council to take over the Metropolitan Water Board and that it would then be, in effect, a department of the G.L.C. What is to happen now? If the Metropolitan Water Board is taken over by the G.L.C., does that mean that it will be relieved of taxation which might otherwise be imposed under this Bill? If so, are we not in a very curious situation, in that we are dependent on legislation which may or may not be introduced by this Government? I do not know what their policy is. I certainly knew that it was the policy of the previous Government that, ultimately, the Metropolitan Water Board would be a department of the G.L.C. Although I was opposed in many respects to the London Government Bill, I thought that this was a sensible move. I hope that it will take place and that the delay has only been a result of pressure on the time of the House, and that that is the reason that no Bill has yet been introduced.
I think that this highlights the anomaly with which we are faced under this Bill, that in one area water undertakings which are statutory water undertakings—we are dealing with them in this Amendment—are subject to this taxation, whereas in another area where they happen to come under a local authority they are not—and this situation may be changed overnight by legislation as in Greater London—and there is no difference whatsoever between one type of area and another from the consumer's point of view.
This is why I say to the Chief Secretary that I was surprised that he did not get up earlier and say that he would either accept the Amendment or bring forward on Report words which incorporated the same principle. I am very disappointed at his reaction, at his getting up at the beginning of my speech and saying that the only reason is that he wants to listen to what is said. He knows very well the principle and the idea behind the Amendment. He has been listening to the debate just as I have, and he could have understood it

and come forward with something before now.
We could expect that the Chief Secrethe hon. Member for the City of Chester tary, having listened to the arguments of and those of the hon. Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) could have said that he was prepared to accept at least the spirit of the Amendment and come forward with an Amendment of his own on Report, even if he does not accept these precise words.

Mr. Diamond: The Amendment was moved in the most acceptable terms by the hon. Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) and supported by a number of his hon. Friends, including the hon. Member for the City of Chester (Mr. Temple), who speaks with great authority on all these matters. It is because the matter is not free from complication, and because, on examination, it reveals a situation which I doubt that all of us had expected that I hope I will have the attention of the Committee in explaining the underlying facts about these statutory water undertakings. The situation is by no means straightforward, and has given concern to a number of hon. Gentlemen. Indeed, it has given concern to me and to the Government.
Perhaps I might start where the hon. Gentleman himself started, and say that there are some forty of these statutory undertakers or water companies which will, without question, be affected by the incidence of Corporation Tax. What I shall say, and I am justified in saying it, is that one of the advantages of Corporation Tax is that it reveals anomalies and inconsistencies. This is one of the anomalies that is being brought to light, and I hope that we can examine it calmly and carefully before deciding what remedy, if any, should be adopted.
The reason why Corporation Tax impinges particularly on these companies is not that they are of the same nature as local authorities—they are not. Local authorities do not have capital which they have to service. They carry out a similar service in many respects, but they are not corporations of the same kind at all. Corporation Tax impinges on these statutory water companies in particular because of their method of servicing their capital, and making their charges to their consumers.
They are legally bound by maximum dividends, so their pricing policy is based on the minimum price that will achieve the dividend they are able to pay, and not more. Therefore, what determines their pricing policy is their dividend policy. What determines their dividend policy is, to a large extent, the investment allowances that have been given hitherto and the anomaly that exists under the present Income Tax.
As the Committee knows, investment allowances mean that the companies with large capital undertakings—and these are such—get an allowance for tax purposes of more than 100 per cent.—130 per cent. under the present rates. That means that a water undertaking of this kind has, in effect, two balance-sheets; one, the balance-sheet it prepares and distributes to the public, and the other, its balance-sheet for tax purposes. In its balance-sheet for tax purposes, it has a much larger profit than in the other, because in its published balance-sheet it depreciates its assets in the ordinary way by 100 per cent. over their lifetime. But, in the other balance-sheet, it depreciates its assets by 130 per cent., so the depreciation is greater and the balance of profit is more.
Out of its additional balance of profit is able to pay a larger dividend than can the ordinary commercial company because it has these large investment allowances. Perhaps I should not speak of an "ordinary commercial company", because a shipping company is in the identical situation—but I refer now to these 40-odd companies. So when the company pays its dividend, having regard to the present structure of Income Tax, the fact that it has never been the policy of the Government, nor is it the law, to have a balancing account with the company to make sure that the tax which the company alleges it is deducting from its dividends and handing to the Inland Revenue it is in fact handing to the Inland Revenue, produces a situation in which a company is able to pay the whole of its profits away as a net divi3end and not to account to the Revenue. The secretary of the company issues a dividend warrant saying, in effect: "I undertake that the tax shown here as deducted has been, or will be in due course, handed to the Inland Revenue." Of course, it is not.
This was never a problem until we had the investment allowance at 130 per cent., but it is the problem today.
1.45 a.m.
Let me give the figures as they affect the 40 companies that have profits on which they pay tax on distributed dividends. They distribute approximately £4 million in dividends. From those dividends they purport to hand over to the Exchequer £1,650,000. That is the standard rate on dividends. In fact, that tax paid by these companies, including Income Tax and Profits Tax, amounts to roughly £400,000. So, these companies pay £400,000 in tax and, because of the elements I have described—the investment allowance and the method of paying dividends net—although they only pay £400,000 in tax, they issue dividend warrants under which £1,650,000 of tax are alleged to have been paid. If those dividend warrants went to people who are not liable to tax the whole of the £1,650,000 would be reclaimed.
In short, the position would be that these 40 statutory water undertakings would have paid out £400,000 in tax and the Inland Revenue and general body of taxpayers would have repaid four times that amount. The general body of taxpayers would have contributed £1,200,000 to the benefit of these water companies, perfectly legally, as a result of the anomalies under the existing system.
This is a matter on which it is not for me to express an opinion. But I would remind the Committee of what was said in the Fourth Report of the Public Accounts Committee in paragraph 10:
The Treasury stated that they regarded this anomaly"—
and that is the kind of anomaly to which I have been referring—
as an incidental consequence of the investment allowance system, which was considered to be an important instrument of economic policy. Your Committee cannot, however, agree that this judgment either justifies or disposes of a loss to the Revenue which cannot apparently be quantified but is clearly substantial. They consider it their duty to draw the attention of Parliament to the situation that exists under the law as it now stands, including the risk that tax avoidance may develop and the prospect that, with the further encouragement of industrial development by means of investment allowances, these repayments are likely to increase both in area and in scale.


The point I am making is that the present capital structure and taxation principles concerning these companies results in their paying £400,000 in tax and under issued dividend warrants individuals can reclaim four times that amount and, therefore, in general, the taxpayers contribute up to £1,200,000 to finance all these companies. Through that they are able to keep their water charges down with the net result that the water consumers of these companies have been paying less than the economic cost and the general body of taxpayers stand—and are doing so up to date—to contribute the balance up to the amount I have described.

Mr. F. V. Corfield: With due respect, the right hon. Gentleman has not been replying to the Amendments. I refer him to Amendment No. 460, which specifically preserves the position that the Government want with regard to the repayment of Income Tax on dividends. The argument to which the right hon. Gentleman has been directing himself is not that to which the Amendments are directed. They are entirely directed to the argument about Corporation Tax. The argument that the right hon. Gentleman has put forward applies to all companies. There is no specific application to the water companies that they are, or have been, in the fortunate position of being able to hold back the tax due on their dividends because they paid them net and not gross and put them against their capital allowances. In Amendment No. 460 we make it clear that we are not seeking to make the water companies an exception in regard to repayment of Income Tax which is deducted from their dividends.

Mr. Diamond: I am fully seized on the hon. Gentleman's point. He must distinguish carefully between Income Tax and Corporation Tax. It is the case of those who tabled the Amendments—and it is very valid—that the incidence of Corporation Tax now brings this to light because these companies can no longer pay gross dividends without deducting tax and accounting for it to the Inland Revenue. Under Corporation Tax, upon a dividend being paid the tax deducted has to be accounted for in the appropriate period. Just as Pay-As-You-Earn is deducted from an employee's

salary, the tax deducted has to be accounted for to the Inland Revenue. In the present situation—this is the nub of the problem—there is no such compulsion under Income Tax upon these companies, and they are, therefore, able to service their capital without accounting to the Revenue for this money. Therefore, they reach a situation in which the general body of taxpayers have, in effect, been paying for part of the water charges of the consumers who have taken the water from these undertakers.

Mr. Geoffrey Wilson: Does not the right hon. Gentleman's argument mean that if his ideas are carried out the charges to these people who are receiving the water will go up? That is what he is saying.

Mr. Diamond: I am trying to explain what the situation is, because those who tabled the Amendment are, naturally, concerned about it and want to know the facts. When we have a change, it is open to every one of us to see why there is a change. When we have a new set of circumstances different from an old set of circumstances, one has to consider whether the new circumstances or the old ones are reasonable ones, and it is the general tendency to assume that the old set of circumstances are always the right ones. I am explaining that the existing circumstances are that the general body of taxpayers are at the moment contributing towards the cost of consuming water by various customers of the companies, and that the way to put that right is for the water consumers who have been consuming their water at the expense of the general body of taxpayers to pay their full charge, which they have not been doing hitherto.

Mr. Anthony Fell: There is one point that the right hon. Gentleman has made six times, that the statutory water undertakers are being subsidised out of general taxation, and he is saying that this is not fair. But does this not also apply to local authorities?

Mr. Diamond: We are not talking about local authorities.

Mr. Fell: Answer.

Mr. Diamond: I am answering the question. The hon. Gentleman has no reason to treat me as if I were a dog.


Who is he calling? Why does he not whistle if he wants to.

The Chairman: Order. I hope the right hon. Gentleman will address the Chair and speak up. I must hear whether he is in order.

Mr. Diamond: I was saying, Dr. King, that I am only too glad to answer any question that any hon. Gentleman asks Me. [Interruption.] I will come to the hon. Gentleman in a moment. When two Members interrupt, Dr. King, and you call one of them, it is not for me to interfere with your decision. Does the hon. Member for Orpington (Mr. Lubbock) wish to interrupt before I answer the previous question?

Mr. Lubbock: I have been waiting for the right hon. Gentleman to answer it.

Mr. Diamond: The reason that I am concentrating upon water undertakings and not upon local authorities is, as I explained at the beginning of my speech—I do not know whether the hon. Gentleman was present then—that there is an essential difference between a local authority and a statutory water company, namely that one is financed and pays dividends like any commercial concern, except that it is limited in the amount of dividend, and the other is not a profit undertaking of that kind. Corporation Tax applies to profits.
I hope, therefore, that I have now explained to hon. Gentlemen who are seriously interested in this matter how it comes about and that in order that there should be equity and that the water consumer should pay the full charge for what he is consuming, the rate should go up and the taxpayer should be relieved. The inequity up to today has been that the general body of taxpayers have been paying for the water consumer.

Mr. Lubbock: I am grateful to the right hon. Gentleman for giving way. I do not know what offence I have comrnitted against him that makes him so cross with me. I wanted to ask him one question about the figures which he quoted. He said that the taxation which was deemed to have been paid on the dividend was £1·65 million and the actual taxation which was accounted for in the Inland Revenue was £0·4 million. I take it that in giving us these figures he is

integrating the figures of the statutory water undertakers over a particular year.
The question I wanted to ask was whether these figures took into account the taxation which was deferred by capital allowances and, if so, whether he could give us any figure of the net change in the amount of taxation deferred by capital allowances in the balance sheets of the statutory water undertakers in the year for which these figures were given.

Mr. Diamond: I cannot give the hon. Gentleman details of that kind which are not published in companies' balance sheets. It is not my job to do that. These figures are taken from the companies' balance sheets. This is perfectly open public information which I am giving, collected together and not referring to any company.
I hope I have made the situation clear. It is a situation which I do not think was anticipated and, therefore, one finds that it takes a little time to sink in. But the net result is that the introduction of Corporation Tax has revealed an anomaly on all fours with that which was criticised by a Select Committee of this House and, in those circumstances, one hesitates to take any action at all in order to avoid an anomaly being removed. What those hon. Gentleman who have put their names to these Amendments are asking is that the removal of an anomaly should not take place because it means a change in the present situation. It is an awkward situation, and I only wanted to explain it.
Having explained the situation—it is a difficult situation—I now want to go on to say that I think the current situation under the new Measure would be the right one. Nevertheless this would have a sudden impact on a number of consumers, to none of whom could one explain in detail what the cause of the change is. I think it therefore right that I should give further consideration to the speeches that have been made and see whether there is any way in which the problem can be met either temporarily or permanently.
2.0 a.m.
I am giving no undertaking that any concession will be made and incorporated in an Amendment or new Clause on Report. I could not possibly give such


an undertaking. The logic of the argument is that the introduction of Corporation Tax puts matters right. It creates difficulties and sudden changes, and I am prepared to look into the matter further to see whether there is a way in which those difficulties can be alleviated.

Mr. W. Baxter: I hope that my right hon. Friend will bear in mind that most of the water undertakings in Scotland—

Mr. Archie Manuel: All of them.

Mr. Baxter: —all of the water undertakings in Scotland are under the control of the local authorities, and the percentage of grant allocated to local authorities and water undertakings in Scotland is based on a ratio applicable to Scotland as compared with England. Water is one of the factors which gets a proportion of the grant. If consideration is given to the suggestions of the Opposition, what they propose means that English local authorities would get an advantage over Scottish local authorities because they would get greater relief in respect of their water undertakings, and similar relief would not be given to Scottish water undertakings.

Mr. Diamond: I am grateful to my hon. Friend for drawing attention to one of the difficulties which beset this problem. It is a matter of very considerable difficulty. It has been revealed as a result of the application of Corporation Tax. I will take into account what my hon. Friend says. It has application not only to Scotland, but to many other parts, and it is the Government's job to see that there is fair play as between different bodies of taxpayer and consumer.

Mr. Corfield: I am only very slightly encouraged by the Chief Secretary's closing remarks. I do not think that he should be in any doubt that in explaining this matter to consumers there will be any real difficulty in persuading them that blame for higher water charges should be directed to the Government.
I had not intended to speak in this debate because I have been invited to become the President of the Water Companies' Association and I therefore thought that it might be presumed that I had an interest. I can only say that it is in no sense a financial interest.
I was astonished to hear the Chief Secretary say that local authorities do not have to service their capital. This is certainly a new doctrine to me. If it is a foretaste of what it is to come, the state of the economy will be even worse than it appears to be. I must take the Chief Secretary to task for directing the whole of his speech to the question of Income Tax. The Amendments are not directed to Income Tax at all. We went to great trouble to put in Amendment No. 460 a provision stating that
Nothing in this section shall exempt a statutory water undertaker from liability to tax under section 43 of this Act".
This was specifically put in to make it clear that the water companies, like everybody else, agree that the law on the retention of tax from dividends with no obligation to pass them as such to the Exchequer was an anomaly which was accepted despite the fact that with them, as with many other companies, it would affect their costs.
The Chief Secretary directed his remarks towards showing that this was a peculiarity of statutory water companies. It is not, and he knows that. A large part of the debate on the Bill has been on this subject, and the Royal Commission's Report referred to this anomaly over a much wider field. However, I stress that there is no question of any of these Amendments being designed to put water companies in any different Income Tax position from anybody else.
The Amendments are concerned with the Corporation Tax, and here the anomaly arises largely because that tax is, as I understand it, specifically designed as an incentive to companies to place more of their profits to reserve and less for distribution. In the cases we are discussing, however, the Government are using this weapon on an organisation which is statutorily barred from building up its reserves. There is a statutory control not only over the total reserves which can be built up but also on the amount which can be placed to reserve in any one year.
The Chief Secretary said, the charges for water determine their dividend policy, which, in turn, is determined by their capital allowances, but what determines their dividend policy is the maximum dividend that they are statutorily allowed to pay—and that amount, of 7 per cent.


at present, must be approved by the Government and is designed to ensure that the water companies can raise the capital they require. It is at a figure which, certainly at present, if it were lowered in any way would make it almost impossible for them to raise any money. It is seldom much above such a level. So it is untrue to say that the dividend policy is determined by anything else than the statutory limit.
We therefore have a situation in which we have an organisation which is a public utility, which is controlled as to the amount of dividend it can pay, the amount it can put to reserve, the amount it can carry over the total amount of its reserves. To apply the Corporation Tax
to this sort of outfit is entirely anomalous and for the Chief Secretary to refer to the anomaly in the way that he did was wrong because we are complaining about the creation of an anomaly, for here is a situation in which the extra tax can only be a direct burden on the water consumer. There is no ocher means by which the money can be raised.
I will give an arithmetical example. The new situation means that for every £100 in net dividends it is required to pay, with the Corporation Tax at 40 per cent. and Income Tax at 8s. 3d., consumers will have to meet charges of about £248. This is made up as follows; working the sum the other way round, with a profit of £284, 40 per cent. of that profit, which is the Corporation Tax, is, according to my calculations, £113 12s. From that must be deducted a further £70 8s. in respect of Income Tax. It will be seen that despite all the Chief Secretary's eloquence on the subject of Income Tax that the Income Tax element is very much smaller than the Corporation Tax element. It is, in fact, £70, as opposed to £113 in every £284. Thus, an income of £284 must be raised under the Bill to find every £100 of dividend, which is the servicing of the capital. That can only be a direct burden on the consumer.
My hon. Friend the Member for the City of Chester (Mr. Temple) said that the Government's tax arrangements would result in increased water charges. That is bound to be so because the water companies are under a statutory obligation to apply their resources to the reduction of water

charges. If those reserves are taxed, the water charges will be higher than they would otherwise be, and in direct proportion to the amount of the tax. It is a direct tax on the consumers of water.
My hon. Friends have referred to the situation which has arisen in the reorganisation of water undertakings over the past ten or fifteen years. I had always understood that there was no difference between the parties on this. The principle adopted was to reduce the number of water undertakings by consolidating them in any one area around the most efficient unit. The fact that there are now 40 fairly large companies left is an indication that they are among the most efficient units in the whole country. At the General Election, we heard a great deal from the party opposite about efficiency, but now it seems that their doctrinaire devotion to an idea of nationalisation by which one makes things more difficult for private enterprise to compete has wholly befogged one of the few rays of light which had begun to strike through the haze which seems permanently to surround the First Secretary of State, among others.
I ask the Chief Secretary to realise that he is applying the Corporation Tax to a species of organisation entirely different from that for which it was designed. Whatever its merit or demerit in relation to an industrial company, it has no application whatever to an organisation controlled as water companies are. The right hon. Gentleman is not removing an anomaly; he is creating one.

Mr. Anthony Barber: I did not rise when the Chief Secretary finished his speech because I was sure that the Committee would wish to hear my hon. Friend the Member for Gloucestershire, South (Mr. Corfield) who, as most people know, has considerable experience of these matters. But, after the extraordinary concluding observations of the Chief Secretary, it is not unreasonable to expect others of my hon. Friends to wish to speak in order to persuade the right hon. Gentleman to be a little more forthcoming.
This has been a remarkable debate. Apart from the Chief Secretary, there have been seven speakers, all on this side of the Committee, yet we are, on


the Chief Secretary's own admission, concerned with increased charges for water for one-fifth of the population of England and Wales. This is a matter of importance to millions of people, yet we have had not a word from the benches opposite, apart from an interjected abstruse point about Scotland.

Mr. W. Baxter: It is strange that the right hon. Gentleman is unable to grasp the meaning of the Queen's English. All water undertakings in Scotland are under the control of the local authorities. The method of apportioning grants to local authorities is governed by what is known as the Goschen formula, which is worked in a way which is equitable to the local authorities of Scotland and England. In Scotland, it embraces water undertakings. In England it does not. Because it does not include water undertakings in certain parts of England, advantages accrue to the local authorities of England.

Mr. Barber: I shall not pursue the matter unduly, unless hon. Members opposite wish me to do so. I understood the hon. Gentleman at the beginning of his first intervention to inform the Committee that the overwhelming majority of water undertakings in Scotland were owned by the local authorities.

Hon. Members: All of them.

2.15 a.m.

Mr. Barber: All the Scottish water undertakings are owned by local authorities. It is of some significance that in the Clause which we are seeking to amend local authority water undertakings are not liable to Corporation Tax, Income Tax or Capital Gains Tax. In these Amendments we are concerned with a limited number of statutory water companies which will be liable to this taxation unless these Amendments are accepted. This is surely the whole issue.
I was somewhat surprised to hear the Chief Secretary in his opening remarks say that one of the advantages of the Corporation Tax was that it brought out the anomalies and inconsistencies. Surely the simple issue which we are now discussing is that before this Bill and before we had heard of Corporation Tax both statutory water companies and the local authorities were liable to Income Tax and Profits Tax and they were treated in precisely the same way.
As a result of Clause 62 the Government are relieving local authorities from any charge for Income Tax, Corporation Tax or Capital Gains Tax but allowing Corporation Tax and Income Tax to be charged normally in respect of statutory water companies which are fulfilling the same function as local authority water undertakers. This is the simple issue on which the Committee has to make up its mind. The right hon. Gentleman said that statutory undertakers were not of the same nature as local authorities. But they are certainly performing the same service to the consumer and they are providing water. He went on to quote from the Report of the Select Committee about investment allowances, but he knows perfectly well that that has nothing to do with the Corporation Tax. Had the previous Government or this Government thought it desirable to put this matter right they could have done so without the introduction of the Corporation Tax.
The purpose of this series of Amendments, as was so clearly put by my hon. Friend the Member for Newcastle-upon-Tyne, North (Mr. R. W. Elliott) in what, if I may say so, was an admirable speech, is to equate the taxation of statutory water companies with the taxation of local authorities which are also water undertakers.
I would like to say this, because it is very relevant in considering what action we should take as a result of this debate. Because of the severe restrictions which are placed on statutory water companies, it is the case, as the Chief Secretary frankly admitted, that a consequence of Clause 62 as drafted will be that there will be higher charges for water than there otherwise would be for a substantial proportion of the population in England and Wales. My hon. Friends made it clear that the increases would range from 15 per cent. to 40 per cent. over the next five years. Some of my hon. Friends gave examples and my right hon. Friend the Member for Ashford (Mr. Deedes) gave the example of the Mid-Kent Water Company which expected to increase its charges by something like 20 per cent.
All this is highly relevant to the Government's policy for incomes and to the increases in the cost of living which have been experienced over the past few


months. I would have thought that the Government would have at least learnt from the consequences of the increases in the petrol duty of last autumn. Here we have another example of the Government taking action which it could have avoided and which will deliberately push up the cost of a necessity to the consumer. There can be no getting away from this.
Although he posed it in jest, the question of my hon. Friend the Member for the City of Chester (Mr. John M. Temple) asked, as to whether the Secretary of State for Economic Affairs was consulted, was very relevant. It is no good the Chief Secretary talking about water companies as though they are the same sort of companies as any other commercial undertakings, because they are not. They are quite different.
Although it is true that when these points were put first there were only two Labour back benchers in the Committee, the whole Committee should recognise this fact. I therefore propose to remind the Committee once again of the sort of limitations which are imposed on statutory water companies, because if it were not for those limitations I dare say there would be something in the right hon. Gentleman's argument.
First, there is the limitation on the charges that these companies can make for domestic supplies. Secondly, the rates of dividend are fixed at a maximum designed to be no more than sufficient to attract ordinary investors. Then there are other points, into which I will not go in detail, concerning the raising of additional share capital and the maximum amount which can be allocated to reserves and contingency funds.
All of this puts these companies in an entirely different position from normal commercial companies. All the Chief Secretary was saying, when concerned with investment allowances, about examples in the shipping industry was quite irrelevant when considering undertakings which have this sort of restriction placed upon them.

Mr. Diamond: It is right that we should understand this fully. This is not a party matter because it affects water consumers all over the country. The right hon. Gentleman said these com-

panies are entirely different from an ordinary commercial undertaking. Could he tell us, from the years of experience he had at the Treasury, what difference there was in the treatment of a water company for taxation purposes as com pared with ordinary commercial companies?

Mr. Barber: The right hon. Gentleman has completely missed the point. When I was at the Treasury, ordinary commercial companies, water companies and local authorities were all treated in precisely the same way. Now the Chancellor has deliberately decided to take action concerning local authorities which, on the ground of equity, puts the statutory companies at a serious disadvantage.

Mr. Diamond: Mr. Diamond indicated dissent.

Mr. Barber: It is no good the right hon. Gentleman shaking his head. This is the case. The one is to be relieved of taxation and the other is to pay Corporation Tax, with the taxation consequences that he outlined. It is the case that, at present, the statutory water companies are among the most efficient in the country. There has been a very considerable amount of rationalisation and amalgamation, and I have never heard any complaints about these companies by any Minister of Housing and Local Government since I have been a Member of the House of Commons. The right hon. Gentleman even went so far as to say that we were not concerned with the local authorities.

Mr. Diamond: Mr. Diamond indicated assent.

Mr. Barber: The right hon. Gentleman nods. But this cannot be so, because one is bound, when considering the functions of statutory water companies and the functions of the local authority water undertakings, to consider also the treatment of the one as compared with the other.

Mr. Diamond: I am grateful to the right hon. Gentleman for yielding again. It would not make the slightest difference in the burden of taxation if the local authorities had to pay tax because of their interest position. No matter what one does to local authorities, it does not alter the situation of the companies to which the Amendment refers.

Mr. Barber: I do not accept that. I realise that local authorities are in a special position because of the way in which they are able to reduce their taxation position by setting off by one means or another. But there is the highly relevant point that the principal consequence of the Chancellor's proposal will be to increase the charges for water. The right hon. Gentleman says this is not a party matter because it affects large areas of the country. That, of course, does not make this a non-party matter. What makes it clear that this is a party matter is that the only hon. Members who have spoken in support of this Amendment have come from this side of the Committee. Conservative Member after Conservative Member has followed each other, and then at a later stage in the debate, the hon. Gentleman the Member for Orpington (Mr. Lubbock) said that he had come into the debate, as I understood it, not knowing very much about the argument, in order to make up his

mind, and was convinced by what we had said. I think this is the way in which the arguments would have affected anyone listening to this objectively and with an open mind. The fact is that at the end of the Chief Secretary's speech, he went so far as to say that the whole logic of this situation, so far as these companies were concerned under Corporation Tax, was, in his view, right.

The right hon. Gentleman has had plenty of time to consider the effect on these companies. He has not given us the slightest idea of what he thinks might be done, and he went out of his way to stress the single argument he could find for maintaining the position in the Bill. In those circumstances, I am bound to say I hope my hon. Friends will press this Amendment to a Division.

Question put, That those words be there inserted:—

The Committee divided: Ayes 135, Noes 146.

Division No. 181.]
AYES
[2.26 a.m.


Agnew, Commander Sir Peter
Gilmour, Ian (Norfolk, Central)
Monro, Hector


Alison, Michael (Barkston Ash)
Gilmour, Sir John (East Fife)
Morrison, Charles (Devizes)


Allan, Robert (Paddlington, S.)
Glover, Sir Douglas
Munro-Lucas-Tooth, Sir Hugh


Allason, James (Hemel Hempstead)
Glyn, Sir Richard
Murton, Oscar


Anstruther-Gray, Rt. Hn. Sir W.
Goodhew, Victor
Neave, Airey


Awdry, Daniel
Grant, Anthony
Noble, Rt. Hn. Michael


Baker, W. H. K.
Gresham Cooke, R.
Onslow, Cranley


Barber, Rt. Hn. Anthony
Grieve, Percy
Osborn, John (Hallam)


Barlow, Sir John
Griffiths, Peter (Smethwick)
Page, R. Graham (Crosby)


Batsford, Brian
Grimond, Rt. Hn. J.
Peel, John


Bell, Ronald
Hall, John (Wycombe)
Percival, Ian


Berry, Hn. Anthony
Hall-Davis, A. G. F.
Peyton, John


Bessell, Peter
Hamilton, Marquess of (Fermanagh)
Pounder, Rafton


Bingham, R. M.
Hastings, Stephen
Powell, Rt. Hn. J. Enoch


Blaker, Peter
Hawkins, Paul
Price, David (Eastleigh)


Box, Donald
Heald, Rt. Hn. Sir Lionel
Prior, J. M. L.


Boyle, Rt. Hn. Sir Edward
Heath, Rt. Hn. Edward
Pym, Francis


Brinton, Sir Tatton
Hendry, Forbes
Redmayne, Rt. Hn. Sir Martin


Brown, Sir Edward (Bath)
Higgins, Terence L.
Ridley, Hn. Nicholas


Bruce-Gardyne, J.
Hirst, Geoffrey
Ridsdale, Julian


Buck, Antony
Hobson, Rt. Hn. Sir John
Roberts, Sir Peter (Heeley)


Buxton, Ronald
Hordern, Peter
Roots, William


Carlisle, Mark
Hornby, Richard
Scott-Hopkins, James


Carr, Rt. Hn. Robert
Hunt, John (Bromley)
Sharples, Richard


Channon, H. P. G.
Jenkin, Patrick (Woodford)
Shepherd, William


Chataway, Christopher
Johnston, Russell (Inverness)
Sinclair, Sir George


Chichester-Clark, R.
Kerr, Sir Hamilton (Cambridge)
Smith, Dudley (Br'ntf'd amp; Chiswick)


Clark, William (Nottingham, S.)
Kershaw, Anthony
Steel, David (Roxburgh)


Cordle, John
King, Evelyn (Dorset, S.)
Studholme, Sir Henry


Corfleld, F. V.
Kirk, Peter
Summers, Sir Spencer


Crawley, Aidan
Langford-Holt, Sir John
Taylor, Edward M. (G'gow,Cathcart)


Curran, Charles
Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)
Taylor, Frank (Moss Side)


Dalkeith, Earl of
Longbottom, Charles
Turton, Rt. Hn. R. H.


Davies, Dr. Wyndham (Perry Barr)
Longden, Gilbert
van Straubenzee, W. R.


Dean, Paul
Lubbock, Eric
Walder, David (High Peak)


Deedes, Rt. Hn. W. F.
Mackie, George Y. (C'ness amp; S'land)
Walker, Peter (Worcester)


Eden, Sir John
McLaren, Martin
Ward, Dame Irene


Elliot, Capt. Walter (Carshalton)
Maclean, Sir Fitzroy
Webster, David


Elliott, R. W.(N'c'tle-upon-Tyne,N.)
Macleod, Rt. Hn. Iain
Whitelaw, William


Emery, Peter
Marples, Rt. Hn. Ernest
Wilson, Geoffrey (Truro)


Errington, Sir Erio
Mathew, Robert
Wise, A. R.


Eyre, Reginald
Maude, Angus
Yates, William (The Wrekin)


Fell, Anthony
Mawby, Ray
Younger, Hn. George


Fletcher-Cooke, Charles (Darwen)
Maxwell-Hyslop, R. J.
TELLERS FOR THE NOES:


Fraser,Rt.Hn.Hugh(St'fford amp; Stone)
Maydon, Lt.-Cmdr. S. L. C.
Mr. Ian MacArthur and


Fraser, Ian (Plymouth, Sutton)
Mitchell, David
Mr. Jasper More.




NOES


Allaun, Frank (Salford, E.)
Garrow, A.
Miller, Dr. M. S.


Alldritt, Walter
George, Lady Megan Lloyd
Morris, Alfred (Wythenshawe)


Allen, Scholefield (Crewe)
Gourlay, Harry
Mulley,Rt.Hn.Frederick(SheffieldPK)


Armstrong, Ernest
Gregory, Arnold
Murray, Albert


Atkinson, Norman
Grey, Charles
Norwood, Christopher


Baxter, William
Griffiths, Will (M'chester, Exchange)
O'Malley, Brian


Bence, Cyril
Hamilton, James (Bothwell)
Oram, Albert E. (E. Ham, S.)


Benn, Rt. Hn. Anthony Wedgwood
Hamilton, William (West Fife)
Orbach, Maurice


Bennett, J. (Glasgow, Bridgeton)
Hamling, William (Woolwich, W.)
Paget, R. T.


Binns, John
Hannan, William
Palmer, Arthur


Bishop, E. S.
Harper, Joseph
Pannell, Rt. Hn. Charles


Blenkinsop, Arthur
Hattersley, Roy
Parkin, B. T.


Boston, T. G.
Hazell, Bert
Pentland, Norman


Bradley, Tom
Heffer, Eric S.
Prentice, R. E.


Bray, Dr. Jeremy
Herbison, Rt. Hn. Margaret
Pursey, Cmdr. Harry


Brown, Hugh D. (Glasgow, Provan)
Hobden, Dennis (Brighton, K'town)
Rees, Merlyn


Brown, R. W. (Shoreditch amp; Fbury)
Horner, John
Reynolds, G. W.


Buchanan, Richard
Hughes, Emrys (S. Ayrshire)
Richard, Ivor


Butler,Herbert (Hackney, C.)
Irving, Sydney (Dartford)
Robertson, John (Paisley)


Butler, Mrs. Joyce (Wood Green)
Jeger, Mrs. Lena (H'b'n amp; St. P'cras, S.)
Sheldon, Robert


Callaghan, Rt. Hn. James
Johnson, Carol (Lewisham, S.)
Shore, Peter (Stepney)


Carmichael, Neil
Johnson, James (K'ston-on-Hull, W.)
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Coleman, Donald
Jones, J. Idwal (Wrexham)
Silkin, John (Deptford)


Conlan, Bernard
Jones, T. W. (Merioneth)
Silverman, Julius (Aston)


Corbet, Mrs. Freda
Kelley, Richard
Skeffington, Arthur


Crawshaw, Richard
Kerr, Mrs. Anne (R'ter amp; Chatham)
Slater, Mrs. Harriet (Stoke, N.)


Crosland, Anthony
Lawson, George
Small, William


Cullen, Mrs. Alice
Ledger, Ron
Snow, Julian


Dalyell, Tam
Lee, Rt. Hn. Frederick (Newton)
Steele, Thomas (Dunbartonshire, W.)


Davies, G. Elfed (Rhondda, E.)
Lever, Harold (Cheetham)
Strauss, Rt. Hn. G. R. (Vauxhall)


Davies, Ifor (Gower)
Lipton, Marcus
Thomson, George (Dundee, E.)


Dell, Edmund
Loughlin, Charles
Tuck, Raphael


Diamond, John
Mabon, Dr. J. Dickson
Varley, Eric G.


Dodds, Norman
McBride, Neil
Wainwright, Edwin


Dolg, Peter
McCann, J.
Walden, Brian (All Saints)


Driberg, Tom
MacDermot, Niall
Wallace, George


Duffy, Dr. A. E. P.
McGuire, Michael
Watkins, Tudor


Dunn, James A.
Mclnnes, James
Wells, William (Walsall, N.)


Dunnett, Jack
Mackenzie, Gregor (Rutherglen)
Whitlock, William


Edelman, Maurice
Mackie, John (Enfield, E.)
Wilkins, W. A.


Edwards, Robert (Bilston)
MacMillan, Malcolm
Williams, Mrs. Shirley (Hitchin)


English, Michael
Mahon, Peter (Preston, S.)
Woodburn, Rt. Hn. A.


Evans, Albert (Islington, S.W.)
Mahon, Simon (Bootle)
Woof, Robert


Fletcher, Sir Eric (Islington, E.)
Manuel, Archie
Wyatt, Woodrow


Fletcher, Raymond (Ilkeston)
Mapp, Charles
Yates, Victor (Ladywood)


Floud, Bernard
Mason, Roy
Zilliacus, K.


Foley, Maurice
Maxwell, Robert



Foot, Michael (Ebbw Vale)
Mayhew, Christopher
TELLERS FOR THE NOES:


Freeson, Reginald
Mellish, Robert
Mr. Alan Fitch and


Garrett, W. E.
Mendelson, J. J.
Mr. William Howie.

The Minister without Portfolio (Sir Eric Fletcher): I beg to move Amendment No. 561, in page 78, line 29, at the end to insert "and capital gains tax".
The object of the Amendment is to make it clear beyond all doubt that the exemption from Corporation Tax which this Clause confers on local authorities is to extend also to Capital Gains Tax. The Committee will appreciate that the Clause as it stands exempts local authorities from Corporation Tax. Clause 77 excludes local authorities, and of course companies, from the scope of the charge to short term gains tax imposed by the Finance Act, 1962, but Clause 77 does not impose tax at the special 35 per cent. rate, since this tax is imposed on a com-

pany, and Clause 62 excludes local authorities from the expression "companies".
In view of the form of exclusion of local authorities from Corporation Tax under this Clause, it might have been argued that they were nevertheless subjected to the long-term Capital Gains Tax by Clause 18. That was not the intention, and the object of the Amendment is to make the position free from all ambiguity.

Mr. Temple: Those Members of the Committee who were here during the previous debate will remember that I asked the Chief Secretary about the position of a river authority with regard to Capital Gains Tax, but he dodged that question. I do not hold anything against the right hon. Gentleman for that, because it was not particularly relevant on that


Amendment. Nevertheless, I had the permission of the Chair to bring the matter in at that time.
It will be within the knowledge of the Committee that for the purpose of this Clause, and for the purpose of this Amendment, a river authority is a local authority. It is only under the Water Resources Act, 1963, that river authorities, by reason of the fact that they are precepting authorities, are brought within the ambit of this Clause, and they now have two separate functions.
One set of functions is what I call their old functions, and the other is their new function with regard to water conservation. Under their conservation function, river authorities are charged with the construction of impounding reservoirs, and they will therefore have to buy large tracts of land to construct these impounding reservoirs.
If I understand the Amendment correctly, the effect of it will be to exempt from Capital Gains Tax that section of the accounts of a river authority which is devoted to the conservation functions. The conservation functions of a river authority are going to be financed entirely out of the water charges account, and that account has nothing to do with the functions which are financed through the precept. I am asking whoever is to reply to the debate to give a clear answer as to whether the Amendment is relevant to the impounding functions of river authorities.
I think that the Minister was here during the previous debate and will have heard my drawing an analogy between the impounding functions of a river authority, under its conservation powers, and the impounding functions which also exist for statutory water undertakings. I said that it would be extraordinarily difficult to value, for Capital Gains Tax purposes, the amount of land which was acquired either compulsorily or otherwise by a statutory water undertaking. [Interruption.] I have no objection to the amount of noise, so long as the Government Front Bench can hear what I am saying.

Mr. Maxwell: Out for a duck!

Mr. Temple: There is a definite similarity between the functions I have mentioned, and I therefore ask whether the two bodies will be similarly treated.
I would draw the attention of the Minister to the fact that it is extraordinarily difficult to deal with the properties of a statutory water undertaking. It is well known that it is a very complex problem to value those properties, because one has to take into consideration not only what is overground but what is underground.
For the avoidance of doubt I hope that the Minister will be able to clear up this point and say whether the conservation works of river authorities, and all that goes with them, will be exempted from Corporation Tax.

Sir Eric Fletcher: The Committee has already reached a decision with regard to water companies. Nothing that the hon. Member said arises on the Amendment. The object of the Amendment is to make it quite clear that local authorities are exempted from Capital Gains Tax as well as Corporation Tax. The hon. Member asked about certain river authorities. It would be more appropriate to deal with that question on the subsequent Amendments which relate to the definition of a local authority. If the hon. Member will look at subsection (2) he will observe that there is a definition of a local authority. He will also observe that there are two further Amendments in the name of my right hon. Friend the Chancellor of the Exchequer—Amendment No. 634, in page 78, line 40, after "applies", insert:
as being an authority having power to levy a rate as defined in section 379 of that Act".
and Amendment No. 688, in line 45, leave out "the commissioners of a town" and insert:
any other body of which all or substantially all the members are elected by local government electors and which is established for public local purposes and has power to raise money for those purposes by rates leviable on the basis of assessments in respect of land".
—which affect the functions of a local authority, about which I shall have something to say in a moment. The hon. Member may find that it is not possible to give a precise answer which is applicable to every case that he has in mind. Some river boards were constituted in one way and some in another. In the case of a particular river board it will be—

Mr. Corfield: Mr. Corfield rose—

Sir Eric Fletcher: I do not want to give way in the middle of a sentence.

The Temporary Chairman (Sir Harry Legge-Bourke): I should be grateful if the Minister without Portfolio could assist the, Chair in this matter. As I understood it, the hon. Member for the City of Chester (Mr. Temple) referred to the question of a river authority and the effect of the Amendment upon such a body. As I understand the subsection to which the hon. Member is now referring, deals with any authority which has power to levy a rate. Can the right hon. Gentleman help the Chair by giving it guidance to this extent: is the power to levy a rate the sort of power which a river authority would have?

Sir Eric Fletcher: I am only too anxious to help the Chair in any way I can—

Mr. Temple: Mr. Temple rose—

2.45 a.m.

Sir E. Fletcher: Perhaps I could be allowed to reply to the question which the Chair put to me. This Amendment seeks to—

Mr. Baxter: On a point of order—

The Temporary Chairman: The hon. and leaned Gentleman is in fact commenting on a point which I put to him. Therefore, it is not in order for the hon. Member for West Stirlingshire (Mr. W. Baxter) to interrupt. When that is completed, T am prepared to hear the hon. Member's point of order.

Sir Eric Fletcher: The answer to the question which you put to me, Sir Harry, is that the Amendment is intended to have general application to other local authorities insofar as it extends the exemption from Corporation Tax to exemption from Capital Gains Tax. That exemption will apply to every local authority. The question put to me by you, and, I think, by the hon. Member for the City of Chester (Mr. Temple) was whether a particular river board is or is not a local authority. You were perfectly right. The definition of a local authority is an authority which has power to levy a rate.

Mr. Corfield: On a point of order—

Mr. W. Baxter: On a point of order. I think that I am entitled, like other hon.

Members of the Committee, to know what conversations are taking place between the Chair and someone else. I am entitled to know what is going on, and it is impossible, sitting here, to hear general conversations taking place at that end of the Committee. I should like to know what is going on.

The Temporary Chairman: The hon. Member is not the only person in some difficulty sometimes in hearing what is going on in this Committee. In so far as the point which I put to the hon. and learned Gentleman is concerned, I was, fortunately, able to hear his reply, which was rather important, in view of the fact that there was a question of whether or not the hon. Member for the City of Chester's speech had been in order. I am now satisfied that it was in order and I should therefore be grateful if the hon. Member who wishes to put a further point of order would now put it.

Mr. Barber: I should like to make one point which is of considerable significance, in view of what the Minister without Portfolio has said. My hon. Friend the Member for the City of Chester (Mr. Temple) raised the question of river authorities generally in England and Wales on the previous Amendment. If I may say so with respect, he has made much the same speech again on this Amendment because he did not get a reply on the earlier one. I certainly expected that the Minister without Portfolio would reply on this Amendment, but he has just suggested that he might give a reply on the next two Amendments, which are Nos 634 and 688.
Those two Amendments are concerned with subsection (2) paragraphs (b) and (c), respectively. Paragraph (b) is concerned solely with Scotland and paragraph (c) solely with Northern Ireland. I should not like to reach the position—I am sure that the Committee would not—in which a reply to my hon. Friend on those Amendments would be out of order. I understood you, Sir Harry, to say that his speech was in order on this Amendment. I hope that we can get a reply now and get on with our business.

The Temporary Chairman: If it were the wish of the Committee in general to discuss these other two Amendments


together with this one, the Chair would have no objection, but it is entirely a matter for the Committee.

Sir Eric Fletcher: On that point of Order. Would it be more appropriate to discuss this matter in a debate on Clause stand part? [HON. MEMBERS: "No."] May I, with great respect, submit that if we are to have a debate about whether any particular river board or other organisation is a local authority within the—

Mr. Corfield: Mr. Corfield rose—

Hon. Members: Order.

The Temporary Chairman: Order. I understood that the hon. and learned Gentleman was himself rising on a point of order. Therefore, it must not be interrupted until it is completed.

Sir Eric Fletcher: I am submitting to you, on a point of order, Sir Harry, that the purpose of this Amendment is of very narrow compass indeed and is intended merely to provide that all local authorities to which the Clause applies shall be exempt from Capital Gains Tax as well as from Corporation Tax—

The Temporary Chairman: Order. I understood that the hon. and learned Member rose originally on a point of order. It now seems to be part of a debating speech. Perhaps he would make it clear that he is speaking on a point of order and addressing the Chair.

Sir Eric Fletcher: My point of order is that if hon. Members wish to raise questions about whether or not particular organisations come within the definition of a "local authority", it would be a much more appropriate matter to be debated on the Question, That the Clause stand part of the Bill.

The Temporary Chairman: If I may say with all respect to the hon. Gentleman, that case could be sustained if Mr. Chancellor of the Exchequer did not have Amendments Nos. 634 and 688 on the Notice Paper, which will raise this very issue before we come to the Question that the Clause stand part. I therefore think that it is for the Committee now to decide whether, in view of those other two Amendments on the Notice Paper, the Committee would find it convenient to discuss all three Amendments—this

one and the other two—together. If that is the wish of the Committee, the Chair is quite prepared to allow it.

Sir Eric Fletcher: If that is the wish of the Committee—

Hon. Members: No.

Mr. Edward M. Taylor: On a point of order. If I may say so, Sir Harry, Amendment No. 634 raises an issue of a particularly Scottish nature, and I think that the Scottish view is that it would be most inappropriate to discuss it with any general question.

The Temporary Chairman: I am sorry, but because of the reaction of the Committee to the hon. Member's remarks I was unable to hear them completely. Will he kindly repeat them?

Mr. Taylor: The point of order I was trying to put was that in the view of Scottish Members, Amendment No. 634 raises a point of a particularly Scottish nature which it would be inappropriate to consider with any general question.

The Temporary Chairman: That may well be, but the fact remains that it raises the question of local authorities and what is meant by "local authorities." Therefore, as those other two Amendments will be called in due course, it is inevitable that the issue of what is a "local authority" will be raised before we come to the Question that the Clause stand part.
The Minister without Portfolio suggested that it would be better to wait for the Question that the Clause stand part before dealing with this matter at all, but in reply to his point of order I have pointed out that because of the two Amendments standing in the name of the Chancellor of the Exchequer it is inevitable that we shall get on to the subject before we reach that stage. I should therefore be grateful to have some guidance as to whether or not it is the wish of the Committee to discuss all three Amendments together.

Hon. Members: No.

Mr. Temple: As it appears that, possibly due to the ensuing noise, I was not able to make myself perfectly clear to the Minister without Portfolio, perhaps I may be permitted to try again, because


this is the Government's own Amendment, which seeks to give exemption from Capital Gains Tax to local authorities.
I would remind the hon. Gentleman of the definition of a "local authority" because, with all due and proper respect to him, he did not get it quite right. He is quite right in saying that a local authority is an authority which has the power to levy a rate, but the definition also includes an authority which has the power to precept. River authorities do not have the power to levy a rate, but they do have the power to precept. The simple question I put was: does this Amendment, in fact, cover what I would call the water conservation powers of a local authority, which are entirely separate, from the ordinary point of view, from the erstwhile function of the river boards, and were added during the passage of the 1963 Water Resources Act.
The question is a perfectly simple one, and I hope that he will answer it. I must say that I do not think that I have ever been faced with a situation in which I have asked a perfectly simple question and not had an answer. The Chief Secretary to the Treasury acknowledged that I was on rather a difficult point when I raised it during our debate on the previous Amendment, but I submit that as I then raised it, the Government have had full warning so they must have information at hand. It is not a terribly difficult question, and if I do not get it answered I shall, unfortunately, draw the conclusion that the Government have entirely run out of steam tonight. I very much hope that they have not run out of steam and will give me a suitable reply.

Mr. Corfield: Could we suggest, in order to try to help the Government, that the Parliamentary Secretary to the Ministry of Land and Natural Resources should reply? He knows about these things and it is quite clear that the hon. Gentleman does not. The Minister without Portfolio said that the constitutions of the river authorities vary. They do not—the authorities were all set up under the one Act and are precisely the same. My hon. Friend the Member for the City of Chester (Mr. Temple) is entitled to an answer, if only because of the fact that he had the courtesy to raise the question earlier so that the Chief Secre-

tary could send the little man to the Box to get the answer.
Is it not time that the Minister without Portfolio got up and answered, or at least had the courtesy to say that it is a difficult point and he will write to my hon. Friend, or even find out that answer and let us know later? [Interruption.]

The Temporary Chairman: Order. If the Parliamentary Secretary to the Ministry of Health (Mr. Loughlin) wishes to raise a point of order, I wish he would do so and not try to carry on a private conversation with the Chair.

The Parliamentary Secretary to the Ministry of Health (Mr. Charles Loughlin): I was questioning whether it was in order for hon. Members of this House to refer to an hon. Member as a "little man who runs to the Box".

The Temporary Chairman: As far as descriptions which hon. Gentlemen give of each other to the House are concerned, it is normal for an hon. Member to refer to another as an hon. Member and only as an hon. Member. I always feel that when any variation from that takes place it can always be misconstrued. I am not prepared to consider what the hon. Member meant by that. I hope in future hon. Members will refer to other hon. Members as hon. Members.

Hon. Members: Withdraw.

Mr. Corfield: May I make it clear that I meant absolutely nothing derogatory at all to the Parliamentary Private Secretary. What I intended to suggest was that the Government should try to find the answer. I think that ought to have been done.

Mr. Barber: My hon. Friend the Member for City of Chester asked a perfectly straightforward question. It was this: in view of the fact that the whole purpose of this Amendment is to relieve the local authorities from charge to Capital Gains Tax and, in view of the fact that for reasons mentioned by my hon. Friend river boards are in the same position as local authorities and are therefore apparently exempt from Capital Gains Tax, what is the position with regard to certain of their functions that are somewhat similar to the functions of a statutory water company? It is a perfectly simple question.
I can understand that it may be that the Minister without Portfolio does not know the answer. What I cannot understand is why, when my hon. Friend has made his speech twice and given notice, the Minister without Portfolio simply sits in his place. If he would care to get up and say that he does not know the answer now but he will look into it, this we would understand. If he continues to sit in silence I can only advise my hon. Friends to vote against the Amendment.

Mr. Callaghan: I hope that the right hon. Gentleman will not vote against it, because what he would be voting against would be a clarification without which there might be some doubt about local authorities being chargeable for Capital Gains Tax. That would not be a very effective form of protest. We are discussing the general question. I agree that the question is deceptively simple. It is clarity itself. But I regret to say we do not know the answer. It is one of those questions to which we have not been able yet to find the answer in spite of all the feverish researches that have been going on. I do not think I can give the answer now, but we will look into that esoteric point and give the answer to the hon. Gentleman in due course.

Mr. J. E. B. Hill: While the right hon. Gentleman searches for the answer, will he consider whether an internal drainage board which levies drainage rates and is in a sense below a river authority is also a local authority?

3.0 a.m.

Mr. Callaghan: There is no limit to the ingenuity of hon. Gentlemen opposite, if they wish to pursue these questions, to raise abstruse issues, on which we will do our best to supply the answers in due course. I am very glad to be able to do so. However, the hon. Gentleman will be glad to know that, in response to his question, I can give him an affirmative answer. As regards water authorities, Section 87(4) of the Water Resources Act enables river authorities to precept local authorities, and they are, therefore, local authorities themselves.

Amendment agreed to.

Mr. Temple: I beg to move Amendment No. 325, in page 78, line 36, after "committee", to insert "or association".
The Amendment is in the names of hon. Gentlemen on both sides of the Committee, including the hon. Member for Southall (Mr. Pargiter). I am sorry that the hon. Member seems to have given up the chase in search of aid for local authorities. Earlier he and I had teamed up, but I think that he may have been a little disgruntled by the rather dusty replies from the Government Front Bench. I do not know whether that is why he is not here tonight.
The object of the Amendment is simple, to put the local authority associations in exactly the same position as local authorities with regard to Income Tax, Corporation Tax and Capital Gains Tax. It is, naturally, supported by all the local authority associations, and I would associate with that the Association of River Authorities, which, within the meaning of the Clause, is a local authority association.
I am not terribly optimistic that the Government will accept the Amendment because I have noticed a tendency to penalise associations of persons when individuals escape new forms of taxation. I noticed that when the Government were dealing with the position of the local authorities' mutual investment trust, although individual local authorities would have been able to take advantage of investing in a certain manner, once they became collective they were debarred from having that advantage. With regard to unit and investment trusts, as soon as people band together the Government do not seem to accept the same rules for them as for individuals.
This is exactly the same position. Local authority associations are purely organisations which derive their funds from the individual local authorities. There seems no reason why they should not be treated in exactly the same way for taxation purposes. I remind the Government that local authority associations are invaluable to all Governments of whatever party. They are entrusted with the task of negotiating very delicate subjects with regard to taxation and local authority finance. Every form of negotiation that takes place between the central Government


and local government is normally conducted through local authority associations. Recognising their extreme value, and recognising that they are purely individual local authorities banded together for the purpose of putting a point of view, I see no reason why they should not be treated in exactly the same way for taxation purposes as those authorities which are providing their revenue.
The amount of tax which local authority associations are paying at present is small. It is mainly tax on their reserve funds. Those funds have been built up out of the subscriptions of local authorities. If the Government do not accede to this Amendment there will be a very simple way for local authority associations to avoid the tax which would otherwise fall upon them. They could do that eittier by deficit finance and by never having any reserve funds at all, or alternatively they could allow their reserve funds to be kept by an individual local authority. It is not for me to suggest how they could avoid paying this tax, but they could run on no accumulated balance and close their accounts with no profit or loss from year to year, and no tax whatsoever would be attracted.
I hope the Government will see the logic of this case and will seek to give the local authority associations exactly the same status for tax purposes as the individual local authorities have. I think this is a much simpler Amendment than those with which we have dealt recently.

Sir Eric Fletcher: I naturally approach this Amendment with a good deal of sympathy because I was until recently a vice-president of the Association of Municipal Corporations, and I share with the hon. Member for the City of Chester (Mr. Temple) and with my hon. Friend the Member for Southall (Mr. Pargiter), who unfortunately could not be here this morning, the admiration of the work which is done by these local authority associations.
I agree with the hon. Member that there does not seem to be any great princip'te involved in this matter. But I do not think I can agree with him that considerations of logic can be called in aid in support of the Amendment, merely because local authorities are exempt from Corporation Tax. These organizations

can by no stretch of the imagination be called local authorities or can be embraced within the definition of local authorities as set out in the Clause.
I appreciate the fact that the work that these organisations do is of a very worthy kind, and is limited to rendering a useful service to local authorities, and it seems to me and my right hon. Friend the Chancellor of the Exchequer that to concede this Amendment would not involve any breach of a serious principle. So far as we can see, it would not lead to any undesirable repercussions. The amount involved is obviously small. There would, as the hon. Member observed, possibly be ways in which, if the Amendment were not conceded, these local authority organisations could circumvent the tax.
In those circumstances, I am authorised to say that if the hon. Member and those who support the Amendment will withdraw it—I do not think it is quite apt to give effect to the object which we all desire—I will undertake between now and Report that my right hon. Friend will put down appropriate Amendments to meet the point.

Dame Irene Ward: I also happen to be a vice-president of the Association of Municipal Corporations, and I thought that I would add my support to the Amendment.
I was delighted to hear the attitude of the Minister without Portfolio and of the Chancellor of the Exchequer, but I am a little surprised that on an Amendment which the Minister without Portfolio described as very simple and proper, it should be necessary to wait to have the matter re-dealt with on the Report stage. All the Ministers concerned with this Bill seem to want double flanking. They never seem to be able to speak for themselves straight away. I do not know whether they have to consult Dr. Kaldor. It may well be that the Amendment does not exactly fit what the Minister without Portfolio has in mind, but in a matter of this kind, having regard to the position which the Minister shared with myself and other Members, the Government might have acceded to our request straight away tonight without adding to the Committee's work on Report.
I wish that occasionally the Government would act straight away when something is acceptable to them. We just go on and on—talk, talk, talk. [HON. MEMBERS: "Hear, hear".] If some hon. Members opposite did a little more talking in support of the reasonable Amendments put forward from this side of the Committee, this would be a much better Bill than it is.
Although I very much welcome the Ministers' attitude, it is a pity that they did not do their homework so that they could gracefully accept the principle of the Amendment without making us work all over again. They might then have had the chance of making this appear to be their idea instead of that of my hon. Friends.

Mr. Temple: I am extremely obliged to my hon. Friend the Member for Tyne-mouth (Dame Irene Ward) for her very timely support. I am extremely grateful that the Amendment has found favour with the Government. I appreciate that the Government draftsmen always like the last word, and I well understand that it will be necessary to put our proposal into acceptable terminology on Report. I am glad that the Government have acceded to the principle of our Amendment, which, as they say, possibly does not have the strength of logic behind it, but which certainly has common sense and equity behind it.

I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Sir Eric Fletcher: I beg to move Amendment No. 634, in page 78, line 40, after "applies", to insert:
as being an authority having power to levy a rate as defined in section 379 of that Act".
Perhaps it would be convenient to discuss at the same time Amendment No. 688—page 78, line 45, leave out "the commissioners of a town" and insert:
any other body of which all or substantially all the members are elected by local government electors and which is established for public local purposes and has power to raise money for those purposes by rates leviable on the basis of assessments in respect of land".
As I have already indicated, both Amendments are designed to clarify the definition of "local authority" in subsection (2) of the Clause.
The first Amendment relates to Scotland and is required in order to exclude from the definition of a local authority the Scottish Gas and Electricity Boards, which are akin to nationalised industries and which, therefore, should not benefit from the tax exemptions conferred by the Clause.
On the other hand, Amendment 688 is required to bring the Belfast City and District Water Commissioners within the definition of "local authority". The language involved in this Amendment is somewhat circuitous because that authority is not wholly elected but has two ex officio members on it. The funds of the Commissioners are partly derived from rates, and they are classed with local authorities in a number of Northern Irish Statutes and, therefore, should be brought within the definition of "local authority".

3.15 a.m.

Mr. Corfield: I wish to put the parallel case of the Clewedog Water Authority. I am glad the Government have realised the existence of the Belfast Water Commissioners. As the Minister said, the Amendment is necessary because of the rigid way in which the Clause is drafted.
We have the absurd situation in which we have the Great Ouse Water Authority and the Clewedog Authority, both of which are made up of a number of public water undertakers which happen to include one or two companies. They are, therefore, ruled out of the benefits which the Clause seeks to give to the local authorities as defined in the Bill. This underlines, first, the stupidity of the distinction which the Clause draws and, secondly, the arguments which we adduced on earlier Amendments for including the water companies, which are totally different from ordinary companies. It seems absurd that the Clause should exclude water companies from the benefits merely because they are different. I welcome the Amendment and hope that the Government will see the stupidity of excluding Clewedog and Great Ouse.

Mr. Edward M. Taylor: I had prepared a considerable speech on the sub-jest covered by Amendment No. 634, for I had anticipated that the Government would not be prepared to change the application of the Clause. It appears, however, that a change in the application


of the exemption procedure has beeen made.
I was amazed to hear the Minister say that the Amendment was designed merely to clarify the situation, for bearing in mind the provisions contained in the Local Government (Scotland) Act, 1947, if the hon. Gentleman feels that this is simply clarifying the situation—by excluding the Scottish Gas Board and Scottish Electricity Board—I suggest that he has not considered certain other things. No doubt my hon. Friends who re present Scottish constituencies will have more to say on this issue. The hon. Gentleman should have considered many other matters in relation to the scope of the Corporation Tax and the general exemption of local authorities. I have one case particularly in mind, but my hon. Friend the Member for Aberdeenshire, West (Mr. Hendry) will raise it later.
In Section 270 of the 1947 Act there is a definition of "a local authority". It refers to an authority which has the power to levy a rate and is given the power to create redeeemable stock. Section 270(4) of that Act points out:
For the purposes of this section the expression 'rate' includes not only a rate as defined in … this Act but also water rates or rents, gas or electricity rates or rents and charges for the supply of water, gas or electricity or the hire of meters or fittings connected therewith.
If, as the Government are now suggesting, we should take the definition as contained in Section 379 of the 1947 Act, then we have a restricted indication of what is meant by the word "rate", for that Section defines the word as follows:
… any rate, charge and assessment the proceeds of which are applicable to public local purposes and which is leviable in respect of lands and heritages".
One major statutory organisation which the Government may not have had in mind is the Highlands and Islands Development Board. What are the implications of the Corporation Tax on that body? Not only the Board itself. What about any kind of business undertaking which the Board might set up under the Highland Development (Scotland) Bill? This is a serious situation which the Government must consider. These undertakings are being set up in the Highlands to carry on normal business activities, financed by the Government, yet they are

to be subject to the full rigours of the Corporation Tax and the Capital Gains Tax. I can only suppose that the Government did not have that in mind when making this simple change.
This is not the first time the Government have shown a lack of appreciation of Scottish law. The Amendment is not just a drafting matter. Apparently, the Government have not taken the trouble to read all the provisions of Section 270 of the 1947 Act, which was one of the principal Acts in Scotland. It is alarming to note that no one from the Scottish Office is present, but I suppose that we ought to be used to this sort of thing. The Government are having difficulty in obtaining Scottish Law Officers, but, in the absence of Scottish Law Officers, they have an obligation to examine with special care all matters affecting Scottish legislation. We have been completely taken aback. We considered that there was here a major change of policy, yet we find that the Government did not take the trouble to read the previous Act. It is not just confusion; they have completely ignored the provisions which really matter.

Mr. Forbes Hendry: This is an extraordinary state of affairs. The Government are proposing legislation which will affect Scottish local authorities, but no Scottish Minister is present, and it is quite evident that no Scottish Minister was consulted. The Minister without Portfolio said that the Amendment was necessary to exclude the exemption of the Scottish Gas and Electricity Boards, but it goes a great deal further than that. Without the Amendment, the British Waterways Authority, which comes within the scope of "local authority" as originally defined, would have been exempt from all these taxes. But, be that as it may, I am most concerned about the Clause as amended because the Government have shown utter ignorance of the Scottish local authority structure.
There will be a completely muddled situation as regards Scottish water authorities. Certain water authorities in Scotland are local authorities under the new definition. For instance, Glasgow Corporation is its own water authority. But there are a great many joint water authorities which have riot power to levy


a rate and which, therefore, do not come within the definition of local authority for the purposes of the Clause. If the Amendment is accepted in its present form, some local authority water undertakings in Scotland will be exempt from taxation and others will not.
The same applies to drainage authorities and to fire authorities. Fire brigades are generally organised not by an individual local authority but by a combination of local authorities, and that combination of authorities does not have power to levy rates. Generally speaking, police authorities in Scotland are in the same position.
The position as regards cemeteries in Scotland will be quite extraordinary. Cemeteries are usually run by local authorities, but a great many are run not by a single authority but by a combination of local authorities. These combinations of local authorities will not be rating authorities and will not therefore be exempted from this tax. A cemetery which is run by a combination of local authorities will presumably make a profit out of interments and digging graves on which they will have to pay tax. There will be an extraordinary state of affairs in which in certain areas in Scotland it will be much more expensive to die. This may sound amusing, but it is a practical point on which the Government has not been advised. It is deplorable that there is no Minister from the Scottish Office present when matters of this importance are being discussed.
I suggest to the Minister without Portfolio that this Amendment as drafted is complete and utter nonsense. He should take it away and produce a better one after he has received proper advice.

Mr. Barber: There is just one small point which I would like to raise with the Minister without Portfolio. Section 171 of the Income Tax Act, 1952, which is concerned with the application of the interest payable by local authorities, contains a definition of a local authority. In Section 171 (4, c) appear words which are identical with those in Subsection (2) (iii) of this Clause, with one exception. The words "an education authority" appear in the 1952 Act but do not appear in this provision. Amendment 688 is to deal with the case of the Belfast City and

District Water Commissioners. The hon. Gentleman said nothing about education authorities, and it does seem a little odd as in the 1952 Act there was a definition of local authorities which has been embodied in toto into this Clause.
We are entitled to some explanation as to why education authorities have been left out. I appreciate that the Minister may not have the answer immediately to hand, and if he has not we will understand but hope that he will understand that the best way of dealing with the matter would be to put down an Amendment on Report to include these words.

Sir Eric Fletcher: I will deal, first, with the point raised about Northern Ireland. I think the Committee will agree that it was right to put down this Amendment in order to deal with the case of the Belfast City and District Water Commissioners, who obviously should be brought within the terms of the exemption granted under the Clause. I had not noticed the distinction to which the right hon. Gentleman drew my attention between the definition of a local authority in Northern Ireland as laid down in Section 171 (4) of the Income Tax Act of 1952 and the definition in the Bill. I cannot say whether there is any significance in the distinction or whether it was deliberate, but I will look into it.
Both the hon. Member for Aberdeenshire, West (Mr. Hendry) and the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) referred to the Local Government (Scotland) Act, 1947, and suggested that the effect of Amendment 634 must be to produce certain consequences which we had not foreseen. All I can say is that between now and Report the Government will see whether the proposed Amendment has any unforeseen consequences.
3.30 a.m.
All the Government are seeking to do in this matter is to ensure that the words are used to secure an appropriate definition of a local authority so that public authorities will have the exemption from Corporation Tax and bodies that are not public authorities will not have it. It is important to get the right words of definition, and I think that we are all conscious in these matters that the law of Scotland does not follow the law of England. That is why the definition of


a local authority varies according to whether it is applicable in England, Scotland or Northern Ireland. We are anxious to get the matter precisely right and we will look into it fully between now and the Report stage.
The hon. Member for Gloucestershire, South (Mr. Corfield) referred to the question of the Great Ouse undertaking. I am not sure which side of the line that falls, but we will look into the matter again between now and Report.

Mr. Corfield: These are, so to speak, wholesale water undertakings. This is a combination for the bulk supply of water, not direct to the consumers. Bath appear to be ruled out, and it seems an absurdity. I will be grateful if the hon. Gentleman will look at it again.

Amendment agreed to.

Further Amendment made: In page 78, line 45, leave out "the commissioners of a town" and insert:
any other body of which all or substantially all the rnembers are elected by local government electors and which is established for public local purposes and has power to raise money for those purposes by rates leviable on the basis of assessments in respect of land".—[Sir Eric Fletcher.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Temple: At a late hour last night the Chief Secretary claimed that the Bill was a masterpiece of logic and clarity. All I can say is that he has, at least on this Clause, succeeded in baffling the local authorities and most of the Committee. I therefore ask only the simple question—all my questions are simple—about the position of local authority superannuation funds. Are the investment incomes of these funds, whether approved or not, exempt from all taxation under this Clause?

Mr. Barber: Perhaps I can raise a more general question. This is the first opportunity we have had of considering this very important Clause as a whole. It raises matters both of commercial importance and of equity as between one trader and another, and so that my hon. Friends and I may consider the position before the Report stage and whether we wish to amend the Clause I ask the Chief Secretary whether I am right in my understanding of the consequences of the Clause.
I start from the following propositions, which I think that all must accept. First, local authorities are already engaged in a considerable number of trading activities, such as catering, direct building and transport. Secondly, it is the avowed policy of many Labour-controlled councils to extend the trading activities of local authorities. Thirdly, many such trading activities are in direct competition with private enterprise.
So that we may consider the matter further before Report, let me put the position under the Clause as I understand it. Firstly, if a local authority engages in a trade within the scope of Case One of Schedule D, then, although it may be in direct competition with a sole trader or a partnership or company carrying on the same trade, that local authority will be exempt from the Income Tax payable by the sole trader, or the partnership and exempt from the Corporation Tax payable by the company. Secondly, my understanding of the Clause is that if the local authority, as an incidence of its trading activities, makes a capital profit, it will be exempt from the Capital Gains Tax, whereas the sole trader the partnership, or the company carrying on the same trade and making a similar capital profit would be liable to Capital Gains Tax, or Corporation Tax in respect of that capital profit.
I pose these very general questions and would like to know from the right hon. Gentleman the Minister without Portfolio whether I have understood the purport of this Clause correctly. Whatever the merits may be, it cannot be gainsaid by anyone considering this matter seriously that a most important principle is at stake here. So that we may consider the matter further before Report, I hope the hon. Gentleman will help us by telling us whether the propositions I have put forward are correct.

Sir Eric Fletcher: I entirely agree with the right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber) that before the Committee parts with this Clause it should understand the reasons that lie behind it. The right hon. Gentleman in his analysis has stated with substantial precision the effect of the Clause. The Clause is designed to relieve local authorities from Corporation Tax. This


may be the first opportunity the Government Bench has had to explain why this is proper. In substance no difference is produced by this Clause from the existing position, although in form there is a difference.
Local authorities, like any other corporations, have previously been theoretically liable to both Income Tax and Profits Tax on their trading profits, but in fact local authorities have been able to set off against their trading profits, any interest they pay on borrowed money. The result is that very few local authorities have ever been called upon to pay any Income Tax or Profits Tax at all. In a recent statistical investigation which was undertaken it has been shown that only 8 per cent. of all United Kingdom local authorities pay any net Income Tax liability on their own account. Similarly, only 4 per cent. of local authorities had any Profits Tax liability.
Therefore, although there is, by reason of this Clause, a change in theory, there is very little change in practice. The reason why my right hon. Friend the Chancellor has thought it proper to let the theory correspond with the practice is that under the existing system a great deal of unremunerative work and time is involved, both on the part of the Inspectors of Taxes and on the part of borough treasurers of local authorities in order to determine whether, in the case of a large number of authorities, there is any tax collectable or not. It is obviously desirable to reduce the unnecessary administrative work involved and for this reason, and bearing in mind that the amount of revenue collected from local authorities in those few marginal cases is extremely limited, we thought the sensible thing to do was to provide once and for all, that local authorities should be exempted from Corporation Tax.

Mr. Barber: I wonder whether the hon. Gentleman happens to know the amount of revenue involved. He gave us some interesting figures about percentages of local authorities. If he could give us the further information it would help us to consider this matter in an intelligent manner.

Sir Eric Fletcher: The figure was given by the Financial Secretary. I think I am right in saying he indicated in the

debate on the Budget Resolutions that the amount at stake would be about £¾ million. I think perhaps I ought to have added that the position being as it was when local authorities were theoretically liable to Income Tax and Profits Tax, of course now that Corporation Tax is being substituted for those two taxes it makes it all the more sensible that we should adopt this new method.

Mr. Corfield: I wonder whether the Minister could clarify one point. He gave figures referring to local authorities, and I am not sure whether they were local authorities in the narrow sense in which we normally use the term or whether he was using the term in the very wide sense in which it is used in this Clause. It is obviously important, especially in relation to the debate this evening, to know whether the term applies to joint boards and other associations of local authorities which operate water companies. If the Minister referred only to local authorities themselves, then the figures are really rather meaningless.

Sir Eric Fletcher: I do not think the figures are meaningless at all. The figures indicate quite clearly that the number of local authorities which pay any Income Tax is only 8 per cent. of all United Kingdom local authorities.

Mr. Corfield: Authorities under which definition? That is what I am asking.

Sir D. Glover: Are they water undertakers?

Mr. Temple: I am very disappointed that Ministers have failed to make any comment on the question I put to them. It is not a difficult question. It was the subject of an Amendment on the Paper, but it was not selected; but it is a perfectly fair question, and I think Treasury Ministers should make some effort to reply to the question whether superannuation funds of local authorities will be exempt from tax.

Sir Eric Fletcher: I apologise to the hon. Member. The answer is quite simple. It depends whether they are approved or not. If they are approved, they are. If they are not approved, they are not.

Sir D. Glover: I wonder whether I could have your guidance, Sir Samuel. I have sat through almost the whole


debate in this Committee today, and I am becoming increasingly worried that we are going through a process in detail of passing Amendments or rejecting Amendments to this Bill when the whole process of Parliament is that you, Sir Samuel, are supposed to be presiding over a Committee which knows what it is doing, and the only—

The Deputy-Chairman: This does not seem to be a point of order at all.

Sir D. Glover: With the greatest respect, Sir Samuel, anybody in the Chair in a Committee of the House is supposed to be presiding over a Committee which is dealing with legislation. We are dealing today with legislation which is going to affect 48 million people in this country. The Minister without Portfolio, upon this Clause, has said three or four times that he does not know the answer 10 the points we have made—

The Deputy-Chairman: Order. That is not a point of order. The Question is—

Mr. William Clark: Could I ask the Minister without Portfolio one very simple question? He seemed to base his answer to my right hon. Friend's various points on the fact that this was only going to cost £¾ million in taxation of major local authorities and that the amount of administrative work put on inspectors of taxes and local authorities was quite nominal and not worth the collection of £¾ million. This was the burden of his argument.
3.45 a.m.
What extra administrative work will be put on local authorities? If they run a trading activity, presumably they keep an account of it, whether it is a café in a park, or a swimming bath somewhere else, or whatever the trading activity may be. They know what their profit or loss is on any particular department. They know precisely how much interest they are paying on various local loans. As far as the Inland Revenue is concerned, it is easy, provided that the accounts have been properly audited, and provided the proper apportionments have been made with regard to overhead expenses, to say, "This department or this trading activity has made £10,000". The accounts will show this, and all that one

sets off is the interest payable, and that reduces the amount of tax. What does the hon. Gentleman mean when he says that a loss of revenue of £750,000 is not worth the administrative trouble of collecting it?

Sir Eric Fletcher: Being a chartered accountant of repute, the hon. Gentleman knows as well as anybody that for tax purposes a totally different set of accounts have to be prepared. If one is going to submit accounts to the inspector of taxes, they have to be prepared in a different way.

Mr. Edward M. Taylor: Is it a fact that under this Clause business enterprises operated by a local authority will be exempt from Corporation Tax but a business set up by the Highland Development Board will be liable to the full rate of the tax?

Hon. Members: Answer.

Mr. Geoffrey Lloyd: May we have an answer from the Treasury Bench? Can we give them more time to think about this by continuing to press the queston? Or are they totally without resources?

Sir D. Glover: On a point of order. During the Committee stage of a Bill the Committee is supposed to hear arguments from both sides and then reach a conclusion. It is impossible for the Committee to reach a decision when the Government say that they do not know the answer to the questions which they are being asked.

The Deputy-Chairman: I have ruled that that is not a point of order.

Mr. Baxter: The Bill which the hon. Member for Glasgow, Cathcart (Mr. Edward M. Taylor) has in mind, the Highland Development (Scotland) Bill, is not yet on the Statute Book. It comes up for consideration tomorrow, and it may be that the House will reject it. The hon. Gentleman is, therefore, considering a hypothetical case. Until that Bill is on the Statute Book, the matter referred to by the hon. Gentleman does not arise.

Mr. Edward M. Taylor: This is a serious matter. The Bill in question has been given a Second Reading and has been considered in Committee. It proposes to set up a Highland Development Board, and presumably other bodies will be set up in the future. The Corporation


Tax will not come into operation this year. The Highland Development Board will come into existence long before the Corporation Tax comes into effect.
Is it the case that a local authority enterprise is to be exempt from this tax while a similar enterprise, perhaps next door, operated by the Highland Development Board is to be subjected to the full rigours of the Corporation Tax? It is a simple question to which we must have an answer before we can accept the Clause.

Mr. Barber: It would help us to conclude our work on this Clause if we could have an answer from the right hon. Gentleman. I was saying that I thought it would help us if we could have an answer—if the hon. Member knows it. If he does not know it, I understand the position quite well, but at least he might do the Committee the courtesy of rising and saying that he does not know the answer, and cannot find it in time.—We should then understand, and proceed with the Bill. I would certainly understand, and I think that my hon. Friends would. But over and over again we have had this business of questions being put to Ministers and Ministers remaining silent. This is the Committee stage, and we are entitled to some answer.
I say, in the presence of the Chancellor, that I do not propose to adopt the attitude which, when I was a junior Minister of the Treasury, was repeatedly proclaimed from this Dispatch Box, that if answers were not forthcoming proceedings would have to go on a little longer. We have not proceeded in that way in this Committee so far. I beg the Minister simply to tell us whether he knows the answer. If he does not we shall understand and, I hope, agree to the Clause immediately.

Sir Eric Fletcher: I cannot help thinking that these observations are facetious. I have already said quite plainly on an earlier Amendment, that between now and Report I will consider the implications of the definition of "local authority" in relation to Scotland and all Scottish bodies in order to see whether any alteration is required in that definition. It must be quite obvious that that includes the Highlands and Islands

Development Board, which is under discussion in a Bill coming up for Report later today.

Sir John Eden: I am not very happy about agreeing to the Clause in this situation. Although the hon. Gentleman has given us an explanation and has undertaken to consider the matter further, at this moment we are being asked to pass the Clause and have it written into the Bill. I am slightly alarmed by the opportunities which the Clause will bestow upon local authority activities. Recently we have seen efforts to extend local authority trading. I do not know where this is likely to end. It is possible that local authority activity will broaden into fields hitherto untried. If so, local authorities will have a substantial advantage over individual private companies trading and operating in the same field of activity. [Interruption.] If the Chancellor wishes to say something, perhaps he will rise.

Mr. Callaghan: If the hon. Member feels that way he should vote against the Clause.

Sir J. Eden: The right hon. Gentleman is treating the Committee exceedingly superciliously. He has shown no courtesy whatsoever in our proceedings and it ill becomes him to adopt a slightly offended manner when it is manifest to him that we have not had a sufficient explanation why the Clause is necessary. If he has any desire to get the Bill he should show greater consideration for the interests of the Committee and give a full explanation why these tax advantages are sought for local authorities. Perhaps he will have an opportunity to intervene later, but judging by the way in which the proceedings have gone on so far we have not had a proper explanation by Ministers who know what the Clause is about. No one seems to be able to give satisfactory answers to any questions. We are asked to take the Clause at its face value without any detailed explanation as to what its effect is likely to be. In view of the present trend towards the expansion of local authority activities I view the Clause with a great deal of suspicion.

The Parliamentary Secretary to the Treasury (Mr. Edward Short): The Parliamentary Secretary to the Treasury (Mr. Edward Short) rose in his place and claimed to move, That the Question be now put.

The Deputy-Chairman (Sir Samuel Storey): I am not prepared to accept the Motion at the present time.

Mr. Webster: I support what my hon. hon. Friend the Member for Bournemouth, West (Sir J. Eden) has said, because we are alarmed not only at the extension of local authority trading and special privileges being given to them. We have at present a situation in which the private sector of the economy is being squeezed and local authorities have already borrowed half their total funds for the year. They are entitled to a total of £360 million in the year, and they have already drawn £156 million. Their drawings last year at this time were only £15 million, so it seems that not only are they being exceedingly privileged, but that they are not subject to the squeeze which is being put on the private sector. It appears that this Clause gives to the local authorities privileges widely beyond what the private sector is allowed. For that reason, I have the greatest reserve about this Clause.

Mr. J. Bruce-Gardyne: I also am particularly concerned about the results of this Clause, particularly in view of what the Minister without Portfolio has just told us about the reconsideration which he will give to ensure that—

Mr. Peyton: On a point of order. Just now, I distinctly heard the Patronage Secretary, on leaving the Chamber, say, "Quite disgraceful", plainly referring to you, Sir Samuel, and to your conduct in the Chair. I followed him to ask whether it was correct and he said that it was "quite disgraceful" and that he had just said so. I told him that I would raise the matter, and I should be grateful for your comments.

The Deputy-Chairman: I did not hear what the right hon. Gentleman said behind the Chair but if he has any criticism to make about the conduct of the Chair he should put a Motion on the Order Paper.

Mr. Peyton: The point which I am raising on this point of order is that the Patronage Secretary was distinctly heard by myself and, I think, by other hon. Members to use the words "absolutely disgraceful" as applied to the Chair. I hope it is clear that I am not making

any criticism of the Chair, but it seems very extraordinary that a remark of that kind should have come from the Patronage Secretary and that he should not now be here to withdraw it.

The Deputy-Chairman: The hon. Member says that the remark was made behind the Chair. I did not hear it. As I have already said, if the Patronage Secretary has any criticism to make of the Chair he must put a Motion on the Order Paper.

Mr. Bruce-Gardyne: I was saying that I was particularly concerned, in the light of the Minister without Portfolio's recent interjection. He told us that he will ensure that paragraph (b) of this Subsection is made to cover the Highlands and Islands Development Board. Of course, this Board is still under discussion in the House, and if it goes through later today we shall be giving it extremely wide powers to trade in the Highlands. It seems to me highly undesirable that we should also, by the provisions of this Clause, give it tax advantages which will strengthen its ability to compete—perhaps to indulge in unfair competition—with other industries in the Highlands.
I believe that, far from encouraging development in the Highlands, this would have precisely the opposite effect. I cannot share the view of my hon. Friend the Member for Glasgow, Cathcart (Mr. Edward M. Taylor) that we should ensure that the Highlands and Islands Development Board is covered by paragraph (b) of this subsection. On the contrary, I should like to ensure that it is not covered, because I think that there are very strong objections to extending these tax advantages to a board which is going into trade. I do not know whether the Minister is aware of the fact—I am sure that he is not, because we do not have that sort of co-ordination on the Front Bench opposite—that this Board, if the Highland Development (Scotland) Bill is passed by the House this evening, will have very wide powers to go into trading on its own account. The Minister without Portfolio is now telling us that it will also get tax advantages on all those operations, and I submit that that will be a very undesirable extension of its advantages which could have very serious effects on other companies operating in the Highlands.

4.0 a.m.

Sir D. Glover: Sir Samuel, we are now experiencing the strange change that comes into the mood of the House in Committee when the Government of the day do not treat the Committee with the respect that is due to it. I do not think that many of us were particularly antagonistic to this Clause when we started to discuss it, but I must say with the greatest possible respect that the Minister without Portfolio is not only without portfolio but without a great deal more—and, most importantly, without knowledge of the Bill and the Clause we are now discussing.
The reason why the Committee has got into a temper is that hon. Members consider the hon. Gentleman's explanations to be ineffective. They have clouded our knowledge, and we now know less about the Clause than we did when he began his explanations. Then the Chancellor of the Exchequer—who like Achilles sulks in his tent all day—makes an extraordinarily and quite unnecessarily rude remark to my hon. Friend the Member for Yeovil (Mr. Peyton) and immediately alters the whole temper of the Committee.
If the Chancellor thinks that this is the way to get his Bill through the Committee, I can assure him that it is just the way to delay it getting through the Committee, because a Committee of the House when considering such matters in detail has the right to expect proper explanations and proper treatment. At this stage we are supposed to be dealing with the detailed implications of each individual Clause, and therefore we have the right to expect that members of the Government Front Bench will make each Clause clear even to the hon. Member for Ormskirk—and I accept that that may be quite a heavy task from time to time. This Committee has no business to pass a Clause when the hon. Gentleman, in interjection after interjection, shows that he does not know the answers to questions.
We are dealing in detail with what this provision will mean once the Clause has been passed. You know, Sir Samuel, that on Report one can bring in only limited Amendments, because of the Committee discussions. The Minister without Portfolio has not clarified the situation one iota but has made it worse, and the only result of the Chancellor's

interjections has been to upset the Committee, and not to clarify the position at all.
This Committee is quite right to view carefully any Clause in any Finance Bill that contains the possible implication of increasing the powers of local authorities for commercial trading contrary, according to the beliefs on this side of the Committee, to the national interest. My Scottish friends have spoken of what may happen when a certain Bill is discussed by us tomorrow. We do not know what will happen to that Bill—it may be that we shall reject it.
When dealing with the Finance Bill the Minister should have some idea of what repercussions may follow the Bill's receiving the assent of the House, but what has been happening is quite obvious, and has been throughout all our proceedings on this Bill. The Chancellor of the Exchequer has now brought in, I believe, some 220 Amendments. I am certain that he will beat Sir Leonard Hutton's score of 364 and will then probably, like Ken Barrington, be dropped from the Test team. I think the First Secretary would be very glad to see that happen at the present moment.
Coming back to this Clause, the Minister without Portfolio has placed the Committee in some difficulty. He has made us far more worried about this Clause than we were two hours ago when we started our discussion. This is a most extraordinary situation—that a Minister in a position of great distinction in the life of the nation and great distinction in the Government, having been given this great responsibility by the Prime Minister, is so inept in the performance of his duties that at the end of two hours debate we are here more clouded in our view than when we started.
The Minister without Portfolio has refused on several occasions to answer my hon. Friends because he does not know the answer. He said to my hon. Friend the Member for the City of Chester (Mr. Temple) on three occasions that he did not know the answer. Yet he is asking us to pass this Clause.
Now the Chancellor of the Exchequer says that we can vote against it. If the Chancellor of the Exchequer is really honest in his belief in democracy he will surely know that this is not really the


answer. You do not vote against a Clause that you do not understand. You vote against it because it has been made crystal clear and you know exactly what you are about, but you do not agree with what the Government are doing. When even the Government do not know what they are proposing, how can we vote for or against it?
It is up to the Chancellor to report Progress and ask leave to sit again. We cannot go on debating a Clause when the Government Front Bench leaves us in this dreadful position that we are now forced to vote for or against something about which the Government do not know the meaning.
Surely, and here the Chair has some responsibility, on this 700th anniversary, we should not proceed with this nonsense but should have something that makes inherent sense.

The Temporary Chairman: The hon. Member is again getting back to what I have ruled out of order. I do not think that there is anything about Simon de Montfort in the Clause.

Sir D. Glover: It is a pity that there 1.5 not, Sir Samuel. Then we might have Ministers who would be able to give us a reply as to what that Clause means. They have not been able to give us any clarification. While I do not wish to vote against the Clause, in view of that unsatisfactory nature of the Minister's replies and the arrogant way in which the Chancellor has dealt with our objections, I hope that we on this side of the Committee will, without hesitation, vote against the Clause.

Mr. William Yates: I am sorry to delay the Committee, but we have run into a serious principle. We are here to make quite certain that we do not bestow executive powers to individual groups or authorities. This Clause is going to bestow certain prerogatives and certain attributes to the disadvantage of the individual.
If this is the situation in which we are placed, we have a fundamental duty to oppose. It seems to me that on the Committee stage of a Finance Bill, where taxpayers' money or any other matter affecting taxation is concerned, when the Government cannot give the Opposition

the answers which they must have, we must in principle oppose.
If the Chancellor or one of his Ministers can in the next few moments give some answers to the questions which have been raised, it will be more satisfactory. It is a new principle for the Chancellor to ask that we should accept the Clause and at a later date he will tell us more about it. That is not the way to conduct the Committee stage. I say with regret that on a direct matter of principle any Opposition Member must oppose the Clause unless we get a satisfactory answer. I am sorry that it has come to that, but I think that that is the situation which faces the Committee.

Mr. Anthony Kershaw: I am not sure that we have gone into the Clause long enough. My hon. Friend the Member for Ormskirk (Sir D. Glover) said that we had been considering it for two hours. But we have been on this Question only slightly over half an hour. It has seemed a long debate because we have been anxiously awaiting an explanation from the Government.
It is difficult for the Opposition to know whether they should pass the Clause or not. I imagine that we would not be against the Clause, but as the Government do not know what it is about, I am not sure whether we can take that position. It is very unfair for the Government to tell the Committee after debate "We do not know any of the important things about the Clause. We do not know what a local authority is, we do not know how much money it will cost, and we undertake to look at it again." In the circumstances, it would be better to withdraw the Clause for the time being so that the Committee should not be misled into passing something the meaning of which may be entirely different from what we think it is.
The Minister without Portfolio told my hon. Friend the Member for the City of Chester (Mr. Temple) that the provision would cost £750,000. That is what local authorities pay in tax for their various enterprises. From subsequent questions the Minister discovered that the local authorities to which he was referring were not the local authorities which my hon. Friend had in mind. We do not know whether the £750,000 is relevant to the debate or not. We have no idea


how much it may cost. It may be a great deal more. If the local authorities are to be extended to include water undertakers, the Highlands and Islands and development undertakings which are likely to be set up in various regions, surely a great deal more than £750,000 will be involved. It is disgraceful that the Minister without Portfolio—I am certain that he did not wish to mislead the Committee—should be revealed as completely ignorant of whether the papers in front of him mean that it will cost £750,000 or not.

Mr. Maxwell: On a point of order. Sir Samuel. Would you be good enough to enlighten a new Member like myself as to why the Committee has to listen to all this amount of drivel when we have such important business in front of us?

4.15 a.m.

The Deputy-Chairman: The hon. Member is speaking to the Question. "That the Clause stand part of the Bill." If he is out of Order I will call his attention to the fact.

Mr. Kershaw: As I do not appear to have made my point clear to the hon. Member for Buckingham (Mr. Maxwell), I had better repeat it. I will start again. I was saying that I was disturbed by the ignorance of the Minister without Portfolio who was unable to say whether he envisaged local authorities, which he suggested would pay tax amounting to £750,000 on their various enterprises, as they are at present defined, or as they may in future be defined when we consider the enterprises they might undertake such as water undertakings, Highlands and Islands enterprises and regional development corporations. If we are dealing with that type of local authority with industrial interests, this Clause becomes a matter of the greatest importance and not merely a matter of £750,000. [Laughter.] The hon. Member for Buckingham laughs. I understand that £750,000 is not very much to him.

Sir D. Glover: Chicken feed.

Mr. W. A. Wilkins: Perhaps the hon. Member for Stroud (Mr. Kershaw) forgets that his hon. Friend the Member for Reading (Mr. Peter Emery)

this afternoon described £2 million as peanuts.

Mr. Kershaw: I can understand that hon. Members opposite do not wish to be reminded of nuts.
Before I get ruled out of order by these interventions, I wish to call attention to the fact that under the Clause as it is at present drafted there may be very severe differences between the tax liability of local authorities and private enterprise operating the same sort of enterprise side by side. It may be known by the hon. Member for Bristol, South (Mr. Wilkins) that there are in Bristol modern car parks, some operated by private enterprise and some operated by the city corporation. Those operated by the city corporation, which are just as efficient as those operated by private enterprise, will pay no tax while the others will pay a great deal of tax. One will subsidise the other.
What is the reason for that? Why do the Government think that this is a good Clause if that is its effect? The car parks look exactly alike. They charge the same prices. But one suffers a heavy tax liability and the other does not. We are entitled to some sort of explanation of this state of affairs. The Clause should be looked at again, and I hope the Government will say something more reassuring than they have said so far.

Mr. Hirst: I rise to speak for only a moment. [HON. MEMBERS: "Oh."] If I want to speak for a quarter of an hour, I will, as you know, Sir Samuel, but as it happens I do not want to do so.
I share the concern which my hon. Friends have voiced about not getting answers from the members of the Treasury Bench. I have received a lot of dusty answers from the occupants of the Treasury Bench in my time, but never in all my experience of 17 Finance Bills have I ever known a Treasury Bench which was unable, time after time, to give answers to questions put by the Opposition when for weeks some of those questions have been in the form of Amendments on the Notice Paper. It is not good enough for the Government merely to say that they will do something about the matter before Report. I am getting deeply concerned about this matter. The number of things which have been left over for the Report stage is enormous. I hope that my right hon. Friends will give


warning that we shall want a very substantial time in which to consider the Report stage so that our numerous objections may be dealt with as well as the hostages to fortune which the Chancellor of the Exchequer has given during the course of our consideration of the Bill.
I feel that when the Chancellor of the Exchequer and his associates cannot give answers to our points on this Clause it is impossible to vote for or against proposals. I do not know what my right hon. Friends think about this, but I believe that we cannot vote for or against something which the Government cannot explain. All that we can do is to make, as we have made for an hour or so, a very earnest protest. I hope that the Government have learned their lesson and that they will not indulge in this sort of impertinence in Committee on another occasion.

Mr. Hendry: As this debate continues, I become more and more alarmed about the possible repercussions of this Clause. The only justification for the Clause which has been given to us is that it will cost only the paltry sum of £750,000. That is no answer, but, in view of the Government's record, the prospect is very alarming.
My hon. Friend the Member for Glasgow, Cathcart (Mr. Edward M. Taylor) mentioned the possibilities of the Highland Development Bill. Instead of looking to that Bill, I should like to look at the present powers of local authorities. I am sorry that I cannot speak about England and Wales, but I can speak about Scotland. A great many local authorities in Scotland already have powers to run cattle markets. It may well be that these authorities will be encouraged by the Government to set up cattle markets in opposition to the established cattle markets throughout Scotland. If that happens, local authority cattle markets will trade, make profits and pay no tax in opposition to private enterprise markets which will suffer through having to pay Corporation Tax.
Various local authorities in Scotland, and I believe in England and Wales, have power to run transport undertakings; and they are doing so. In a great many cases they are run very inefficiently and

make losses, but there is no reason why these transport undertakings should not make profits in competition with private enterprise. Throughout Scotland there are small companies running private enterprise bus services in the country. They are finding it extremely difficult to do so, but they are making a livelihood from them and are paying Income Tax on the profits that they make.
If a county council which is running an education authority exercises its present power to run a school bus and to carry passengers in it in competition with a private enterprise bus company, it will derive benefits which are not available to the private citizen. The private citizen, struggling to make a living and to pay his taxes, will be put out of business, and this will be encouraged by the Government unless they give a definite undertaking that they will not encourage local authorities to exercise the powers which they already have. I may be wrong in this, but if I am there is unfortunately no Minister responsible for local government here to put me right.
The Highland Development (Scotland) Bill envisages a situation in which local authorities will establish advisory services. What is to hinder a town clerk or country clerk giving legal advice, perhaps in competition with local solicitors who are paying Income Tax and, if they are lucky, Surtax? Local authorities will be able to provide these services without having to pay the tax which people trying to earn a livelihood must pay. The Highland Development (Scotland) Bill envisages the Highlands and Islands Development Board doing all sorts of things, not only acting as solicitors but as accountants. Is it the intention of the Government that local authorities should perform tasks of this nature while the ordinary citizens of this country are trying to earn a livelihood, doing precisely the same things, but having to pay Income Tax on what they earn?
The Government say, as though to excuse what they propose, that the saving would be only £¾ million. That may be a small amount in the view of the Treasury, but it will have great repercussions among the ordinary citizens. The Clause is utterly undesirable and should be struck from the Bill.

Sir D. Glover: Before my hon. Friend sits down—

Hon. Members: No.

The Deputy-Chairman: Order. The hon. Gentleman had sat down. Dame Irene Ward.

Dame Irene Ward: It is obvious that the Treasury Ministers have met their Waterloo in our discussion on the Clause stand part. They have completely collapsed. They cannot answer our questions.
Having listened to the discussion, all sorts of new ideas and questions have sprung to my mind. For example, have the Government considered the position of the development districts under the Clause? This is important to the North-East Coast, Scotland, Wales and Northern Ireland. Having spent a long time yesterday listening to Treasury spokesmen saying what they were doing to protect the development districts from the operation of the Corporation Tax, what will happen to those areas which are for the time being, but not for long, under the control of Socialism? What will happen, considering the so-called incentives which the Government propose to give to industry, if local authorities decide to go in for municipal trading in the development districts? If we pass the Clause without knowing clearly where we are going, we shall do great injury to the development districts. I want to know from the Napoleon on this occasion what he has in mind for the protection of the development districts.

4.30 a.m.

Mr. Cyril Bence: All right, Josephine. [Laughter.]

Dame Irene Ward: It is always very encouraging, at half-past 4 in the morning, to know that the House of Commons can laugh, but, unfortunately, I cannot join in the laughter because I did not hear what the hon. Gentleman said. [Laughter.] I hear a lot of queer things in my time—

The Deputy-Chairman: Order. There is nothing about queer things in the Clause. The hon. Lady must get back to the Question.

Dame Irene Ward: I want the Government to give us a satisfactory assur-

ance about the position of development districts under the Clause. In my part of the country, the North-East Coast, with the new regional development and other alarming growths of Socialist administration, it will be extremely difficult to encourage industry to come in if there is to be municipal trading of all kinds. Industrialists will much prefer to stay in areas where there are Conservative local authorities which do not believe in municipal trading. This is a most important matter. I want to know the answer. Let Napoleon arise and strike a blow for justice and fair administration.

Mr. Callaghan: As these historical analogies are flying about, perhaps I may be forgiven for preferring to assume the mantle of Nelson rather than Napoleon, as I have been trying for a long time to turn a blind eye to what has been going on. But I can never resist the hon. Lady the Member for Tynemouth (Dame Irene Ward), and I feel that I should give her a reply.
The position of local authorities in the development districts will be exactly the same as that of local authorities in all other areas, namely, that in respect of their trading activities they will be exempt from taxation. I hope the hon. Lady will not feel that that is likely to be deleterious to any other activities in the area the interests of which she always pursues so vigorously in this Chamber. I do not think that it will be particularly, and I hope, that she will share that view.
Although there have been some refinements raised, particularly with reference to Scotland, this is a comparatively simple matter. It was thought right, for administrative reasons as well as because of the small amount of tax at issue here, that local authorities should be exempt from the Corporation Tax. We understood that this view met with the approval of the association for which the hon. Member for the City of Chester (Mr. Temple) has been speaking, and I understand that it meets with the approval of a great many other hon. Members opposite. I think that probably the whole Committee will share the same view. At least, I hope so.
It is possible to raise bogeys or, indeed, legitimate fears about the extension of trading activities by local authorities. If it were thought that the extension of


trading activities by local authorities on a wide scale was likely to be the direct result of their exemption from the Corporation Tax, then, no doubt, Parliament would wish to look at this matter afresh, because this would raise a new issue of principle. The hon. Member for The Wrekin (Mr. William Yates) and the hon. Member for Bournemouth, West Sir J. Eden) raised as an issue of principle how far local authorities should be entitled to go into the field of trading activities in order to see whether they cut across what are regarded as the legitimate activities of private traders. This is an issue on which I have no doubt the Committee would not now wish to come to a conclusion. This is not the purpose of the Clause, which is to deal with the activities of local authorities as they exist at the present time. Because of the labours and the great deal of work involved for everybody in these matters and because of the small amount of revenue, it seemed to us, and, I think, to a number of hon. Members opposite, that they should he exempt.
We are entirely in the hands of the Committee. You, Sir Samuel, in your wisdom have refused to accept a closure Motion as you think there has not been sufficient debate, so it is entirely up to the Committee how long the debate goes on. It is something for every hon. Member to make up his own mind about. It would rot be unfair to say that after two hours on the Amendment and the Clause it has had a fair run.

Dame Irene Ward: A fair run.

Mr. Callaghan: Yes, a fair run. After all, it was the hon. Lady who got me to my feet. I hope she does not want me to prostrate myself in front of her.
We have had a discussion which has been useful. The purpose of the Clause is quite clear, and I can only ask the Committee to come to a conclusion. I ask the Committee to take the view that it should not vote on the extension of local authority activities. I appeal to the Committee not to vote because I do not think this Clause raises any great issue of principle. If hon. Members decide to vote, then I think they will be depriving local authorities of a small but valuable concession and, in the present circumstances, it would not be appro-

priate. I do not think that a great issue of principle arises on this Clause.
The Minister without Portfolio has given an undertaking to consider the Scottish position between now and Report, and I am bound to say that I think he has been courtesy itself throughout the whole of the discussion on this Clause. I think the whole Committee will agree with that. All I can say is that we have more work to do and we have had a good discussion. I therefore urge the Committee to come to a conclusion on this Clause.

Mr. Barber: I rise to urge my right hon. and hon. Friends to be influenced neither by the ill temper of the Patronage Secretary nor the depressing appearance of the Treasury Bench.
The attitude of the Government to the Amendment to this Clause and the debate on Clause stand part has been apparent to all of us, and I do not propose to enter into the depressing experience of trying to describe it. The fact is that this Clause does raise very important issues. It is no use the Chancellor, whichever side the merits may lie, getting up and appealing to the Committee and at the same time talking about bogeys.
It is not simply a question of competition between local authorities and private enterprise in trading activities. There is also the important question of the number and types of bodies which qualify for exemption. We have not had an answer to a number of questions on this point. I repeat, so that there shall be no misunderstanding about what I feel, that I do not blame the Minister without Portfolio for not knowing the answers to some of these points, and he has kindly said that he will consider them before Report stage, for which we are grateful.
It is all very well for the Chancellor to say that this is entirely a matter for the Committee. Of course it is, under your guidance, Sir Samuel. With a little more enlightenment earlier and a little more courtesy from the Chancellor earlier, we might well have completed our discussions on the Clause a long time ago.
I am sure that, despite the provocation we had from Government spokesmen earlier, we would be wise to consider the matter between now and Report and, in


particular, to seek from other sources the information necessary to make up our minds. I hope that on this occasion my right hon. and hon. Friends will let the Clause go through and, if necessary, return to the matter on Report.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 63.—(UNIT TRUSTS AND INVESTMENT TRUSTS.)

Question proposed, That the Clause stand part of the Bill.

Sir Lionel Heald: This Clause sets out the machinery for carrying into effect Clause 34. A number of Amendments to it were put down but, no doubt for excellent reasons, they have not been called. I desire, however—and I have the support of a number of my hon. Friends—to object to the Clause unless and until we have certain assurances or explanations or undertakings from the Chief Secretary.
I will indicate, first, the grounds upon which I object to the Clause. I can put them under three headings. First, the machinery itself is quite unsound and unsatisfactory and illogical because it relates to two entirely different things. The idea is that the application of the Capital Gains Tax to both the company in the case of an investment company and the shareholders is to be mitigated in fairness by means of a system under which a certificate is given to the shareholder which he can use to assist him by way of deduction when he has to pay his own Capital Gains Tax.
So far as the company is concerned, that figure will be arrived at, as we understand it, by considering the notional capital gain made by the company during a certain accounting period which would, presumably, be at the end of the previous year. The shareholder's capital gains on which he will be taxed will be the profit on selling the shares, and the value of the shares will have nothing to do with the capital gains that the company has made during the previous year. It will depend upon the opinion of the market as to the value of the holdings of the company. One is, therefore, relating two entirely different things. It is an artificial and

unsound arrangenment from beginning to end.
4.45 a.m.
The next point is that this machinery makes possible and necessary an arrangement which is entirely unfair because it ensures that the individual shareholder in the investment trust company is not able to take advantage of the alternative of assessment on an Income Tax basis. If he himself were suffering tax he would be able to claim that he should be assessed on the Income Tax basis, which would be 27½ per cent. in the case of an ordinary standard rate taxpayer, 22½ per cent. in the case of someone with, I think, £900 a year, and so on, down to nothing at all. The arrangement found enshrined in Clause 63 and worked in combination with Clause 34 prevents that happening and insists that in so far as there are capital gains realised by the company those will be taxed at 35 per cent. or 40 per cent. We consider that to be a thoroughly unfair and unsatisfactory arrangement, involving discrimination against the method of collective investment, and we say it is entirely contrary to the public interest.
The third reason is that we do not at this time know to what state of affairs Clause 63 will be applied, because when Clause 34 was dealt with the matter was left in complete uncertainty as to what Clause 34 was eventually going to be. I have a serious complaint to make against the Chief Secretary, and I hope it will be found that what happened during the debate on that Clause was a matter of error. I would be perfectly prepared to find that the Chief Secretary was able to explain to us how it came about that the matter was left in such complete confusion. It is a serious matter, and I asked the Chief Secretary about it in a letter I wrote to him ten days ago, but I have not had the courtesy of an acknowledgment. Arguments against the principle of the application to investment trusts and unit trusts of the Capital Gains Tax were put up, but there was no answer from the Chief Secretary at all. Instead, he adopted a rather old Treasury trick of producing from up his sleeve a so-called concession which we had had no previous opportunity of considering. The Committee knew nothing of it until it came out, and, of course, we were in the dark about it. It is very difficult, even


for those who understand these things, to take it in in a few minutes.
But worse than that, he led the Committee to believe something which was just simply not true, and I am going to prove this in a moment by reference to the OFFICIAL REPORT. He led the Committee to believe that the so-called concession was agreeable—using his own language—to all the associations concerned, that is to say, the Investment Trusts Association as well as the Unit Trusts Association. He went further and said that it had in fact been put forward by them—in the plural. That is to be found in the OFFICIAL REPORT for 31st May, at columns 1288–9.
Alas, as we now know, that simply was not true. It was not true. At the time it came as a great shock to me. I am not connected with any of the trusts, unit trusts or investment trusts, but I had understood from Lord Tangley, who is a leading figure in the field of investment trusts, that the A.I.T., the Association of Investment Trusts, far from being promised any concession, had been turned down flat by the Chancellor of the Exchequer. But alas again, the Committee was not told; and, of course, that took the ground completely from under the feet of people like myself who did not know anything about the background. We found in fact—again I say there may be an explanation for this—that the Chief Secretary had sold us a dummy. Then my hon. Friend the Member for Twickenham (Mr. Gresham Cooke) asked the Chief Secretary point blank, "Does the concession you are proposing to give apply to the investment trusts as well as the unit trusts?" And the answer was, "Yes, definitely." That can be found in column 1297. Later, as reported in column 1308, my right hon. Friend the Member for Sutton Cold-field (Mr. Geoffrey Lloyd) was unhappy about it—very unhappy. He returned to the charge, and he expressed doubt as to whether the concession which had been described could ever be of any value at all to the investment trusts, and there was no reply from the Chief Secretary. He said no single word about it during the rest of the debate.
In the result, my right hon. Friend the Member for Bexley (Mr. Heath) withdrew the Amendment. He said he was very

dissatisfied; it was very uncertain in his view what, if anything, investment trusts had got; and he thought the only thing to do was to wait and see what eventually happened. And we were rather in the same position we were in just now on the last Clause: we allowed a Clause to go through without really knowing what it was going to mean. My right hon. Friend the Member for Bexley, of course, reserved the right to raise the matter again, as would be the natural effect of withdrawing an Amendment, if it should become necessary. This is a serious matter on which we must have a full explanation from the Chief Secretary.
The next morning one of my constituents who is an investor in one of these trusts rang me up and gave me his very best thanks. He understood that we had gained a splendid concession for them, and he wanted me to tell him what it was. Shortly afterwards another of my constituents, who is an expert on investment trusts, rang me up. He was in a different frame of mind. He wanted to know how we could have allowed ourselves to be led down the garden by such a swindle, as he put it. He said that it was ridiculous to suggest that investment trusts were going to get anything at all. I got on to Lord Tangley, and I was told that that was right. He said that a concession of the kind that had been indicated meant nothing at all to them. Further, he said that there had never been any agreement with the Chancellor about it.
As a result of all that, I thought it necessary to write a letter, which was published by The Times on 2nd June, saying that there was the utmost confusion on this matter and that it was surely right that the Chancellor should take steps to dispel the confusion and uncertainty. On Thursday, 3rd June, I wrote to the Chief Secretary pointing out to him that there was some confusion and asking that the matter should be dealt with. I have received no acknowledgment or answer of any kind, sort or description, and until some proper explanation is made I shall object to this Clause, and I hope that my right hon. and hon. Friends will support me.

Mr. Gresham Cooke: This very complicated, costly and cumbersome Clause, which sets out the way in which the


Corporation Tax or the Capital Gains Tax on unit trusts and investment trusts should be apportioned, would not have been necessary at all if the Chancellor had taken the advice which my right hon. Friends and I have consistently given him and the Chief Secretary, namely, that the Capital Gains Tax should be put not on unit trusts or on investment trusts, but on the individual, as is done in America. In that event the individual can be assessed and he can pay the Capital Gains Tax according to the rate that is appropriate to him.
Instead of that, it is put on the unit trust, and, as my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) has said, that leads to a form of double taxation. The whole of the Finance Bill is double taxation. There is double taxation of shareholders through Corporation Tax. There is double taxation of overseas companies, and now we have double taxation of unit trusts and investments trusts and their shareholders.
The result is that the poor man—and I mean poor in the monetary sense—who comes along and puts his hard-earned savings in investment or unit trusts will pay more tax than the rich man who is able to invest directly in his own portfolio of shares. Whereas the rich man will pay 30 per cent. at most, or perhaps 27½ per cent., in Capital Gains Tax, the poor man will have to pay at the rate at which the unit trust is assessed, namely, Corporation Tax at 35 per cent. or 40 per cent. That is why the whole of this arrangement as embodied in the Clause is so wrong.
5.0 a.m.
I could list many other ways in which the shareholder is hit, but that would be going outside the Clause. I think that the Chief Secretary admitted during the discussions that we had on 31st May that investors in these particular trusts were going to be hit. He said:
All we know is that there is an extra rate to pay—there is, and no one says there is not. One does not attempt to reduce or extinguish that gap. There are advantages to be obtained from corporate investment as opposed to individual investment. If people want to do that, they must assess the advantages and disadvantages, and there is no difficulty about that."—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1288.]

He admitted that the man who invests by means of this corporate method will be at a disadvantage as compared with the richer investor.
Not only that; a unit investment trust has to follow an extremely complicated method in sending out certificates at the end of the year showing how much tax each individual has had to pay—or, rather, has had to earn. It will be impossible to send these out with the final dividend, as is envisaged in subsection (5), because, as subsection (6) provides, the leave of the inspector of taxes has to be obtained before the final dividend and apportionment can be sent out. All that will take time, and I do not think that the apportionment can go out at the same time as the final dividend. There will be extra work and an extra complication.
To whom are the certificates of this Capital Gains Tax to be sent? Will they be sent to the actual holders? A holder may have just come into the unit trust. The capital gains earned during the course of the year may not have been earned in respect of the holder who has just come in. Will the certificate be sent to the actual holder at the end of the year, or to the previous ones? That is the sort of question we want cleared up.
As one of the investment trust managers said to me, "What will be sent to the holders will be certificates to the effect that they have earned 4d. Capital Gains Tax during the course of the year". The debate on Clause 34 was spoilt by the mistakes made by the Chief Secretary, and the miserable concession he gave. He gave the impression that it was a good concession, but it was a negative one. I understand that five possible concessions were put forward by the unit trust movement and associations to the Treasury. The Treasury chose the most niggardly one.

The Chairman: I hope the Committee will assist the Chair. We cannot completely repeat the debate we had on Clause 34. The hon. Member will remember that when we debated Clause 34 we discussed both aspects of the unit trust. I hope that the hon. Member will not repeat the whole debate now.

Mr. Gresham Cooke: I will not do that, but I must refer to what took place


in the debate, because it leads on to this Clause. In the debate I specifically asked whether this concession applied to investment trusts as well as unit trusts and I was told that it did. I will admit that later in the debate the Minister rather lamely excused himself by saying that he thought that there had been a mistake or misunderstanding, and that it did not apply to investment trusts. But many hon. Members, having heard the concession, went out of the Chamber and the debate came to an end.
The concession applies only to a contracting unit trust, as the liquid assets re set off against the realisation of securities, and it is not of much value to an expanding company. They are of no value to an investment trust and of no value to an expanding unit trust. My view, as I have always said, of the way in whie this Clause should be dealt with is by exempting the unit and investment trusts from tax on gains made on their fixed assets. After all, these gains are fixed assets within the meaning of the Companies Act, 1948. Learned counsel has given the opinion that the investments of these trusts are fixed assets just a s any industrial companies have fixed assets, the benefits of which are exempt from Capital Gains Tax under Clause 31.
I think that the Chancellor has let himself in for a highly complicated procedure, and it will not work. As set out in this Clause, it will be expensive. The poor man who goes in for this kind of investment will be worse treated than the rich man. It is extremely unsatisfactory. I want the Chief Secretary to give some of the answers on this point: I feel very strongly opposed to the Clause as it stands.

Mr. Anthony Grant: This Clause is the Corporation Tax "tail" which links up with the Capital Gains Tax arguments which we had over Clause 34. The basic argument which tie unit and investment trust movements advanced in objection to the whole basis of taxation which is envisaged—is the argument on principle, which is that it is quite absurd that people who invest—and they are usually, inevitably, small savers—in unit and investment trusts should be penalised and charged a higher rate of tax than if they invested direct.

I think it is important to remember, as was said in previous debates, that the average holding in a unit trust is only about £334, spread over many thousands, even millions, of investors. Sensible suggestions were made as to how this could be alleviated, and I see that there is an Amendment on the Paper indicating how this Clause can be dealt with.
The second argument is the administrative one, and this is the one with which the Clause is almost exclusively concerned. Although it was the lesser of the two complaints of the movements, the administrative argument showed that there would be enormous complexity in computing the liability to tax of unit trusts in particular. I expect that this applies also to investment trusts. The argument was that the complexities in computing the annual certificate in this connection would be quite remarkable. Something which hon. Members would surely wish to encourage is that many of the unit trusts have a scheme whereby people can contribute £1 a week or a month—small sums—and if a person engages in this wholly desirable method of investing it encourages the spread of wealth and the spread of ownership.
Over a period of ten years, with 520 subscriptions, there would be 520 different base dates from which to calculate this tax liability. It would require a computer, considerably more staff and arithmetical effort on the part of the unit trusts to calculate this tax liability. Of course, they have professional staffs who may well be able to provide this sort of service, but there can be no doubt that it will add considerably to the expenses of management, and therefore to the expenses of shareholders. The small savers, who are desirable members of the community whom we want to encourage, will undoubtedly be penalised in that respect also.
In the previous debate, the Chief Secretary rejected out of hand all the arguments which were put forward by the investment and unit trusts on the astonishingly feeble grounds that, by reason of the argument of deferment, holders in a unit trust and/or an investment trust would be better off if the holders instead of the trusts were liable to tax on realisation. Nobody on the Treasury Bench has explained why under


the Bill as now drawn these investors should be worse off. Every excuse is made for not making them better off, but we are not given any reason for making them worse off. The reason is that the Treasury Bench is quite obsessed with the argument that no unfair advantage must be given. That is what we always hear—

The Chairman: Order. I hope that the hon. Gentleman will help me. It seems to me that at the moment he is repeating the debate I heard when we discussed the Amendments under this Clause together with the Amendments to Clause 34. The hon. Gentleman must link what he now has to say to the Clause in front of us.

Mr. Grant: I appreciate that, Dr. King, so I will come to the position as it is at present. In that debate we had a concession by the Chief Secretary, but as my hon. Friend the Member for Twickenham has said, it was no concession at all. The right hon. Gentleman said that it was a meeting half way between the members of the unit trust movement and the Treasury, but he did not really budge an inch. All that happened as a result of that concession was that the unit trust movement was allowed to continue its operations. Without that concession, the unit trust movement would have folded up completely.
What should be made quite clear is that not one penny of concession by way of relief from tax is given to the shareholders in unit trusts. They are still faced with the enormous administrative difficulty—

Mr. Harold Lever: I should like the hon. Member to clear up one point for me. His right hon. and learned Friend the Member for Chertsey (Sir L. Heald) quoted my right hon. Friend the Chief Secretary, who said:
Nevertheless, this is a reasonable half-way house, and I am glad to say that it is being put forward by the associations themselves…—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1289.]
Is the hon. Gentleman saying that the suggestion was not, in fact, put forward by the associations?

Mr. Grant: No, that is not my understanding. I understand that the members

of the unit trust movement were called before the Treasury by the good offices of my right hon. Friend the Member for Taunton (Mr. du Cann)—who informs me that he did no more than link the movement with the Treasury—and were then asked what sort of concession they required. They put forward four suggestions and were then asked, "If none of these is acceptable, what would you say?" Possibly naively, they produced the last suggestion, on which the Chief Secretary seized. That is what the right hon. Gentleman put forward as a halfway house, but I think I am right in saying that far from meeting them halfway he hardly budged an inch.

Mr. Harold Lever: On this narrow point about the Chief Secretary's supposed misleading, my right hon. Friend apparently correctly informed the House that this suggestion was put forward by the Association of Unit Trusts. He says that the concession amounts to nothing, but can he explain why these experienced gentlemen, who look after a good deal of public money with great skill and zeal, put forward suggestions for a concession which was not worth a penny to them? I am a little puzzled.

The Chairman: Order. I hope that the hon. Member for Harrow, Central (Mr. Grant) will not answer that question. This debate is getting very much like the second debate on the Question that Clause 34 stand part. I hope that hon. Members will help the Chair.

5.15 a.m.

Mr. Grant: I accept what you say, Dr. King, but it was trust in the singular and not plural.
The situation they now find themselves in as a result of that is that they are only just able to carry out their operations. The administrative difficulties are quite enormous for the unit trust and investment trust movements.
If I do not strain the rules of order, I would like to mention one other body in an identical situation. I am referring to the difficulties of the investment club movement. Investment clubs are in a similar situation to unit trusts. It is remarkable the growth that has taken place in the investment club movement. In 1958 there were no more than about a dozen of them. Today there are over


2,000, I am told, and they invest something like £2½ million per annum. But they are mostly in very small groups and mostly are very small savers.
They are often small groups of men on the factory floor, in the pub or club. All the same, they are performing a useful service, and this is a growth that is to be encouraged, because it is wholly desirable. These people are practising thrift, acquiring economic and financial knowledge of our system, and also providing vital investment.

The Chairman: I do not think they come under the Clause at all.

Mr. Grant: I accept your Ruling, Dr. King. But these investment clubs do have the same administrative difficulties which I described when referring to unit trusts, without having skilled managements to deal with them.
The Government have got into a considerable muddle over this Clause and over the position of the unit trusts and investment trusts as a whole. I do not for one moment believe that it is deliberate. I accept the Chief Secretary at face value when he dealt with the subject and said that his attitude towards savings was that the Government must encourage them by every possible method. What is being done is by accident rather than by design, but savings are being seriously damaged by the Bill and the particular Clause.

Mr. Diamond: I agree, in view of the comments that have been made, that this is almost a repetition of the debate we had previously. The right hon. and learned Member for Chertsey (Sir L. Heald) has made some extraordinary allegations, without notice, alleging that I deliberately misled the Committee; that I, a Treasury Minister, deliberately led the Committee down the garden and engineered it so that this Committee would be passing this into effect on a misunderstanding.
I hoped I would not ever have to answer a charge of that kind. But I will do so. The right hon. and learned Gentleman said that he had sent me a letter. If he did, I accept his word. But no letter has been received by me. I can only say that I regret it. As far as my Department is concerned, I am well served with an excellent staff and it is

their almost universal habit to send an acknowledgment immediately a letter has been received, even although the letter does not reach my desk immediately that day.
If no acknowledgment has been sent to the right hon. and learned Gentleman, it is conceivable that the letter has never reached the Treasury at all. All I can say is that if the right hon. and learned Gentleman says that he sent it, he has obviously sent it, and if I say that I have not seen it, obviously I have not seen it. That is the explanation about the letter.

Sir L. Heald: Sir L. Heald rose—

Mr. Diamond: I think that it would be convenient to clear the allegation first. I listened very carefully while the right hon. and learned Gentleman was accusing me of conducting this Committee down the path and deliberately misleading it.

Sir L. Heald: I did not say that.

Mr. Diamond: The right hon. and learned Gentleman misquoted the OFFICIAL. REPORT. I will answer him first, and then I will give way. Dr. King, I hope that I shall have your generosity in allowing me to reply to the attack that has been made on my integrity by referring to the debate which took place on Clause 34 on 31st May. Had I been warned about it, I should have been able to collect the material much more shortly. I said in column 1288:
There have been many discussions relating to administrative convenience.
That was the matter which was at issue, not whether there was any tax to pay. There is no double taxation. That was made clear by the Chancellor in his Budget speech. It is just the question of whether the tax is collected from the trust or from the unit holder. I went on:
Quite shortly, the difficulties were between the convenience, on the one hand, of the unit trust managers—I do not think that the investment trusts come into this very much"—
The right hon. and learned Gentleman said that I deliberately misled the Committee into believing that the investment trusts were offered a concession which was wholly erroneous.
—and of the Inland Revenue, on the other. Both must he considered. I am happy to say that as a result of very full discussions—and I want to acknowledge the very great help the Government have had from the associations


representing all these bodies, and particularly the right hon. Gentleman the Member for Taunton (Mr. du Cann)"—
who, incidentally, was gracious enough to drop me a note of appreciation—
—who has taken his proper place in these discussions, and we are very grateful to him—we have reached broad agreement, and I do not want to tie down anyone who has not yet seen any particular Amendments, which will result in Amendments being put down on Report which, I hope, by the time they have been read and carefully considered by all interests, will be found to have met the difficulty. Shortly, the method proposed is that unit trusts will pay Capital Gains Tax on changes of investment on the assumption that their units remain constant in number, but if the units are falling—that is to say, if individuals had been paid back—that amount will be deducted from the figure on which the Capital Gains Tax is assessed
and so on. I now refer the Committee to column 1301.

Sir L. Heald: What about column 1397?

Mr. Diamond: I will refer to anything to which the right hon. and learned Gentleman directs my attention, but I will refer to column 1301 first because the right hon. and learned Gentleman did not feel it right to refer to it. I said:
I intervene for the second time for only a moment because I might have misunderstood what was said by the hon. Member for Twickenham (Mr. Gresham Cooke), and the last thing that I would want to do is to mislead the Committee in any way. I agree with the hon. Member for Croydon, South (Sir R. Thompson) that it is only when the Amendment is put down and it can be carefully studied that we can give it the consideration which we would all want to afford to it. I hope that I made it clear in my original speech, when referring to the concession which had been arranged, that I was talking about taxing switching, but not taxing the reduction in the number of units. As is well known, an investment trust does not operate in this way. I do not say a run, but if there are a number of unit holders who want to be paid out the only thing the unit trust can do is to sell its investments to pay them out. There would be a net contraction at the end of the year. It is those holders who would be taxed directly, and not the trust itself—I hope that I have made it clear to the hon. Member for Twickenham that this is not a problem with which the investment trusts are faced."—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1288–9, 1301–2.]
In view of all that, for the life of me I really do not know—

Hon. Members: Read on.

Mr. Diamond: —why the right hon. and learned Gentleman, with his great experience of justice and courtesy, should choose to say that I deliberately misled the Committee into voting—

Sir L. Heald: I did not.

Mr. Diamond: —into accepting the Clause on the assumption that I was talking about investment trusts. Nor do I understand why the hon. Member for Twickenham (Mr. Gresham Cooke) was so mean—untypically mean—as to say that I may have said something afterwards but by that time everybody had left the Chamber. I made the position perfectly clear.
Let me add this. It is possible—and I apologise for this immediately—that in an exchange I misunderstood what the hon. Member for Twickenham was saying and did at that time use words which might have misled him. I tried my best at the earliest possible opportunity, as soon as I realised that I might have misunderstood—and I have never seen the HANSARD report till this minute—to make it absolutely clear what the position was, and in those circumstances I do not think that hon. Members have the slightest justification for this unwarranted attack.

Sir L. Heald: I did not use the word "deliberate". When the OFFICIAL REPORT IS read tomorrow morning it will be found that I did not suggest that it was deliberate, and that I was perfectly prepared to accept the explanation when I got it. That will be on record in HANSARD. I quite understand the right hon. Gentleman's strong feeling, but he has represented me as having made an accusation which I did not make. My hon. Friends will bear me out. I took the greatest care over it, and it is quite wrong, as the right hon. Gentleman will find when he sees HANSARD, to suggest that I made this accusation.

Mr. Diamond: Perhaps we can get on with the Clause now that the right hon. and learned Gentleman has made it clear that notwithstanding the phrase about "leading the Committee down the garden path", which I recollect clearly, or "selling a dummy", he did not mean that I was in any sense lacking in integrity.

Mr. Gresham Cooke: As I have been drawn into this discussion, may I refer to column 1297? I said:
I listened carefully to the concession made by the Chief Secretary, but, as far as I can see, it does not apply to the investment trust.
Mr. Diamond: The concession applies equally to the unit trust and to the investment trust. I pointed out that there is an administrative problem in relation to unit trusts which applies less or is non-existent in relation to investment trusts, but the concession affects both equally.
I said:
I am glad to hear that. The hon. Gentleman emphasised the unit trust so much in explaining the concession that I thought that it did not apply to investment trusts."—[OFFICIAL REPORT. 31st May, 1965; Vol. 713, c. 1297–8.]
As far as I was concerned, the steam went out of the debate when I heard that. I shortened my speech considerably and, to me, that was the end of the matter.

Mr. Diamond: I do not think we can leave it at that. I want to repeat without any reservation whatsoever my apology for having said apparently, according to HANSARD at column 1297,
The concession applies equally to the unit trust and to the investment trust.
"Equally" would not be right. I clearly misunderstood the hon. Member for Twickenham. It is not difficult to do so when there are the usual exchanges going on in Committee. I made the position clear within two columns, and the hon. Member for Twickenham was present and heard me say:
I hope that I have made it clear to the hon. Member for Twickenham that this is not a problem with which the investment trusts are faced",
because he immediately got up and said:
I am obliged to the hon. Gentleman for saying that, because I thought that the concesswn applied only to unit trusts. I am glad that he cleared up the point, because that was the impression I had."—[OFFICIAL REPORT, 31st May, 1965; Vol. 713. c. 1302.]
5.30 a.m.
I am sorry to have detained the Committee at this hour, but when a member of the Government is attacked it is right, on behalf of the Government, apart from any individual feelings which may have been extremely hurt, that a full reply should be made.
There is little that I can add on the Clause because little has been added in

the debate. Perhaps I can say in reply to the arguments that the rate is unfair that we are now back on the 35 per cent. rate as against the 30 per cent. rate which the individual would pay, or a smaller rate which the individual would pay. The position simply is that there is no question of double taxation whatsoever. My right hon. Friend has fully recognised that unit trusts or investment trusts are of the nature of trusts, as their titles indicate, and that there is, therefore, no question of double taxation.
The only question which arises is: which should pay the tax, the unit trust or the unit holder? An arrangement has been made for unit trusts, where the difficulty arises—there is no such difficulty about investment trusts—which, when hon. Members have the opportunity of reading the Amendment which is not yet down on the Notice Paper and, therefore, for the second time I repeat that I hope that they will not reach a conclusion until they have read it carefully, will, as far as may be, be a reasonable halfway house between the desire of the unit trusts to be saved the maximum of inconvenience and the desire of the Inland Revenue to be saved the maximum of inconvenience. That is an arrangement which, I think, should be satisfactory to both sides.
We cannot pursue the Amendment to which I have just referred in any detail because it is not down on the Notice Paper, and I am not asking—

Mr. Grant: lit will not save a penny of tax.

Mr. Diamond: Nobody is saying that. We are talking about administrative convenience. That is the only question which arises.
On tax, I can only repeat what has been said many times. The Government take the view that a corporation pays Corporation Tax on its profits, from wherever they are derived. Whether they are derived from capital gains or income makes not the slightest difference. This has advantages and disadvantages. The only thing which the Committee has noted so far is the disadvantage in the sense that an individual is called upon to pay 35 per cent. who might otherwise pay at a lower rate—either 30 per cent. or an even lower


rate. What has not been pointed out is that equally an individual might have to pay at a much higher rate. If these gains are made by an individual in a year, he will be paying the full standard rate plus Surtax. He might be paying at 12s. or 15s. in the £ instead of the flat 35 per cent. which applies here.
The philosophy is simple. In terms of equity, it is reasonable. Sometimes it is more to the advantage of the individual, sometimes it is less. The philosophy is clear: here is a corporation; it pays Corporation Tax.

Mr. Geoffrey Lloyd: I am sorry that I cannot accept the Chief Secretary's arguments, and I must say that, as an investment trust director, I consider that the Clause contains a thoroughly bad scheme for dealing with the problem with which it attempts to deal and I should like to examine it from the point of view of the various subsections and the way in which it will affect both the investment trusts themselves and their shareholders.
I am glad that my right hon. and learned Friend the Member for Chertsey (Sir L. Heald) brought up this matter, because, although there has never been any question of imputing bad faith on the Chief Secretary's part, there has been very considerable misunderstanding in the investment trust movement.

Mr. Harold Lever: Before the right hon. Gentleman commits himself to any further statements, I suggest that he consults the OFFICIAL REPORT for 31st May. In the same debate in which the Chief Secretary is said to have misled the Committee, the right hon. Gentleman is recorded as having said:
Earlier the Chief Secretary gave the impression—I may be mistaken—that investment trusts were included in the concession which he had arranged with the unit trusts. I think that recently the hon. Gentleman has corrected that impression".
In other words, the right hon. Gentleman was perfectly well aware that any misunderstanding had been cleared up.

Mr. Lloyd: I suggest that the Committee considers the rest of the passage from which the hon. Gentleman quoted. It continues:
I think that recently the hon. Gentleman has corrected that impression. I have consulted the Association of Investment Trusts since his speech and find that it has not been consulted about any such arrangement. It

would be useless to investment trusts, because their problem is different. The Chief Secretary seemed to imply that they had no administrative problem, but we do not think that is so".—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1303–4.]
The hon. Member for Manchester, Cheetham (Mr. Harold Lever) will realise that in the statement which I made then there was no imputation of any deliberate misleading on the part of the Chief Secretary. The point was that owing to the undoubted impression in the Committee that an important concession had been given to the unit trusts, there was an impression also in the Committee, at any rate at a certain stage, that something important had also been done for investment trusts. The debate collapsed in a way in which we did not expect, and, as a result, there was considerable indignation in the investment trust movement because we had not pressed our case far more strongly. I hope that we can leave the matter there because I wish to address my remarks to the badness of the scheme as set out in the Clause. Subsection (3) states:
After carrying out an apportionment under subsection (2) of this section the unit trust shall …
issue a notice in regard to the total net gains. It states that the gains must he set out separately for each accounting period. Subsection (5) goes on to lay down that
A notice under subsection (3) … may be combined with the statement in writing required to be given under section 199 of the Income Tax Act 1952 …
which, I think, is the statement which details the amount of tax paid in regard to dividends. Like my hon. Friend the Member for Twickenham (Mr. Gresham Cooke), I would like to know whether this arrangement is practicable. Subsection (6) states:
Before the notices … are sent out, particulars of the apportionments shall be submitted to the inspector …
which means that he must give his approval to these notices before they can be sent out, yet it is suggested that they should go out with the dividend warrants.
I want to examine this from a practical point of view because, generally speaking, these warrants go out about 12 weeks after the end of the financial year. If we make allowance of about three weeks—which, the Financial Secretary will agree, is a reasonable time, considering


the time involved in giving notice of the meeting and so on—then that leaves only eight weeks for the inspector to give his approval on a matter which is not necessarily going to be all that easy for him to decide. Bearing in mind that this work w 11 fall almost certainly on the relatively few inspectors in particular districts in the City of London, there is a considerable doubt as to whether this scheme will be administratively easy to carry out. This is a point of importance for the Committee because we are laying down a procedure, and it would be most unfortunate if we laid down one which could not be administered efficiently.
The Clause gives a statutory right in respect of an accounting period, and we must decide exactly to whom this right belongs and when the notice will be issued. This is not dealt with in the Clause. Should it be issued to those on the share register at the date when the accounting period closes, or should it go to the man who is entitled to receive the final dividend? It will be important to clear this matter up, because otherwise there may be questions of legal recourse by shareholders against the investment trust itself.
Subsection (2) relates all this to what are described as total net gains, and the shareholder will, in effect, be taxed at the Corporation Tax rate instead of at his much lower individual rate. I shall not dwell on that point, but it is a matter of considerable importance, adding weight to the view of the investment trust movement that this is a thoroughly bad scheme set out in the Clause. We are here dealing with one of the greatest and most historic saving movements in the country and dealing essentially with people who, generally speaking, are engaged in long-term investment. This is another reason why the terms of the Clause are peculiarly inappropriate.
It is by no means uncommon for someone to invest in an investment trust for 25 years. Under the Clause, he will have to keep 25 pieces of paper during all that period before he will be able to know, when he may have to realise part of his investment, what his Capital Gains Tax position is. Most investment trust shareholders are not highly organised people with accountants to do their work. It is one of the advantages of the investment trust movement that people have been

able to feel that all this kind of work has been done for them and everything has been simplified. The pieces of paper to be used under this Clause are quite different from the dividend warrants with which it is suggested they be associated. The dividend warrant has an immediate effect and is discharged at once—it is cash—quite different from these elaborate certificates which have to be kept for a long time.
I fear that, unless the Government revise the scheme, they will injure the investment trust movement and cause a great sense of injustice in the minds of hundreds and thousands of investment trust shareholders.

Mr. Harold Lever: I shall not repeat the arguments I used in the previous debate when I made plain that I dislike the Clause and I am not satisfied with the treatment accorded to unit trusts, but I wish to emphasise that, in my recollection, which is very clear on the point, no one was misled in any way whatever by the Chief Secretary's statement. I spoke after my right hon. Friend had finished, and I thought so little of the concession to my point of view that I did not mention it in my argument and ask for further concessions. I certainly was not misled. It is quite clear that the hon. Member for Twickenham (Mr. Gresham Cooke) was not misled, because he said:
I am obliged to the lion. Gentleman for saying that, because I thought that the concession applied only to unit trusts. I am glad that he cleared up the point, because that was the impression I had.
Later on the right hon. Gentleman the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) said:
Earlier the Chief Secretary gave the impression—I may be mistaken—that investment trusts were included in the concession which he had arranged with the unit trusts. I think that recently the hon. Gentleman has corrected that impression. I have consulted the Association of Investment Trusts since his speech and find that it has not been consulted about any such arrangement. It would be useless to investment trusts, because their problem is different."—[OFFICIAL REPORT, 31st May 1965; Vol. 713, c. 1302–3.]
I suggest that my right hon. Friend persuaded that Committee that investment trusts were not included. The hon. Member for Twickenham and the right hon. Member for Sutton Coldfield were well aware long before the Amendment was withdrawn that my right hon. Friend was


making no concession to investment trusts at all.

Mr. Gresham Cooke: One of the difficulties about this is that in the Press the next day there were large headlines "concessions for unit and investment trusts", so undoubtedly the Press got that impression.

5.45 a.m.

Mr. Lever: If the right hon. and learned Member for Chertsey (Sir L. Heald) had said that the Press had misled his telephoning communicants that would have been a different matter. I am sure that the hon. Member does not wish to be unjust to my right hon. Friend, and we should be absolutely clear that nobody was misled and everybody knew perfectly well what they were doing.

Sir L. Heald: It is true to say that there was undoubtedly a view held in the Committee generally that there had been a concession offered to investment trusts and, therefore, the matter was to be left in abeyance. There was no doubt about it. It was there and I talked to a number of people, and that was the impression they had.

Mr. Lever: I would conclude by saying that this is not so. I have quoted the two main protagonists, and now I will quote the right hon. Member for Bexley (Mr. Heath). He was not misled, he is far too intelligent. He said:
The Chief Secretary said that he has discussed this with the Association of Unit Trust Managers, and that he proposes to put down an Amendment with that aim.
Note that he said "unit trust managers".
I think that he will agree that both investment and unit trusts wish to be exempt from the Capital Gains Tax and want to fall on the holder of the shares or units. That was their first position, which they put to him and his colleagues. Having failed to secure the first position in their discussions, they have moved on to other schemes, one of which the Chief Secretary will follow in his Amendment.
My first reaction is that this does nothing to help the investment trusts, though it helps the unit trust from the point of view of the withdrawal of units."—[OFFICIAL REPORT, 31st May, 1965; Vol. 713, c. 1306.]
The right hon. Gentleman made it clear that his impression was that nothing was done to help the investment trusts and he went on to say, reasonably and fairly, that he was going to withdraw the

Amendment because he had been informed that there was a concession of some kind, it was right that he should not press it to a Division and that he and his hon. Friends should give fair and proper consideration to the undertaking.

The Chairman: I think we should now get away from the debate on Clause 34.

Mr. Lever: It is perfectly false to say that the Committee was misled. I was not misled; the hon. Member for Twickenham was not misled; the right Member for Sutton Coldfield was not misled, and the right hon. Member for Bexley did not press his Amendment and so was not misled. I am sure that the Committee could not have been misled by anything that my right hon. Friend said.

Mr. Grimond: You will be glad to hear, Dr. King, and so, I hope, will the hon. Member for Manchester, Cheetham (Mr. Harold Lever), that I was not misled either. The Chief Secretary made a mistake and corrected it in the course of the debate later.
It has been suggested by people well versed in tax law that, in this instance, where the Commissioners are being asked to determine a new type of case, the appeal should lie with Special and not General Commissioners. Again, as has been pointed out by the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd), many investors in investment trusts and unit trusts—and I am concerned particularly at the moment with the former—are small investors with no great knowledge either of investment or of accountancy. Could the Chief Secretary therefore tell us something about these notices?
I take it that they are simply an entitlement to a reclaim. Or are they a settlement? As I understand subsection (6), the final examination may not be made in the accounting period in which the notice is issued. The closing words are:
… the inspector may give his approval notwithstanding that any amounts are not finally ascertained on the footing that any adjustment is effected in the apportionment for the following accounting period.
By the following accounting period, people may have disposed of their shares. Perhaps the right hon. Gentleman will spell out the position of these notices in


the hands of the investors. Should not art investor be warned that, although he gets such a notice, it is liable to amendment? Presumably he has to be notified that final apportionment has not been made. It should be put on record that the investor should be careful and not assume that final adjustment has been made if there is any indication on the notice that the matter is still before either the inspector or the Commissioners.

Mr. Peter Hordern: This Clause is utterly impracticable in relation to investment trusts and unit trusts, but I am particularly concerned with the former. Under subsection (6) the notices would not be sent out without the approval of the Commissioners. Investment trusts, when making a declaration of final dividends on the Stock Exchange, use a procedure whereby shares are quoted c am final dividend for the period and later the net dividend is subtracted from the price of the shares. This is the procedure to be followed when the Capital Gains Tax certificate is issued by the investment trust because necessarily the two documents cannot be sent out at the same time. In addition, of course, there will be the physical difficulties of sending out thousands of extra documents on quite a different date, together with the extra expense.
These are just two practical points of difficulty in the Clause. I cannot help but feel impressed by the complete prejudice shown once again by the Chief Secretary in using the same kind of defence for the Capital Gains Tax on investment trusts. The only reason the Government have ever produced is that this is a way of catching the rich man who is trying to get away with it. That is a most ludicrous argument. Any one who knows anything about investment trusts knows that it is naive to think that a rich man is prepared to put his money into investment trusts in order to try to avoid Capital Gains Tax. It is a ludicrous suggestion. I do not even like talking about it in the presence of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who must be deeply embarrassed.
In any case the rich man has a perfectly good alternative. He can invest in British Transport. The whole point

about this Finance Bill is that so far as the rich man is concerned the Bill has been blown wide open. Why not admit that so far as investment trusts are concerned and stop trying to mess around with the interests of thousands of small investors and a growing movement which is making a valuable contribution to the savings of the country and to the country's prosperity? I ask the Chief Secretary to look at this again.

Mr. William Clark: I am sure we all enjoyed the Second Reading verbatim debate of the debate we had on the 31st May. I do not think that in the whole of this debate there has been any suggestion that people in unit or investment trusts should be entirely exempted from Capital Gains Tax. I am sure the Chief Secretary will accept this. It is merely a question of how and when this tax is raised.
I would like to prove to the Chief Secretary that when he says there is no double taxation he is really using the wrong arithmetic. I do not know if his attention has been drawn to an excellent article in the Investors' Chronicle of the 11th June, which is headed "For Richer, For Poorer". This analysis shows there is extra taxation by taxing the company and the individual, whether it is an investment trust or a unit trust.
I would earnestly ask the Chief Secretary to look at this article. He will see there that while he maintains, as he did at that Box a few moments ago, that there is no double taxation, the examples in this article show that if one has direct taxation for direct investment the Capital Gains Tax suffered will be £15. If one has the same sort of investment through a unit or investment trust the amount of tax paid will be £17·2. The Chief Secretary may say that through a unit or investment trust the price of the units fall consequently and relief may be obtained through this method. Even taking the fall in the price of the unit or the investment trust one will still be paying £16 for the same investment. There is the £15 if it is direct investment, £17·2 if it is wholly through a unit or investment trust, and if account is taken of the fall in the value of the unit trust that has suffered this capital gain it is still £16.

Mr. Lubbock: Mr. Lubbock rose—

Mr. Clark: Whilst the Chief Secretary keeps saying this is not double taxation I hope he will accept the fact that it is more taxation. This extra taxation is not going to hit the rich man, the tycoon. This is the point which has been well-rehearsed and convassed. I would ask the Chief Secretary to look at the question of this form of saving, because I know, with his great experience aid interest in these matters that he has always been keen on savings and has supported me when I was sitting on the back benches over there and looking for his support when moving new Clauses. The real differences between the two sides of the Committee are the differential rates of 40 per cent. for Corporation Tax and the individual tax rate of 30 per cent.
6.0 a.m.
If the Chief Secretary still agrees about that, as he used to when he was in Opposition and used to support Amendments moved in the interests of small savers by my hon. Friends and myself from that side of the Committee, why is he now taking action to hit the small savers? Of course, nobody wants to allow the tycoon, or the very rich man, to get away with it. Nobody wants that. It is quite wrong for anybody in this Committee or elsewhere to think that we on this side are merely interested in the rich man. We on this side have done more for the small man's savings in the last 13 years than any other Government in our history. I know, Dr. King, that if I were to go on in that strain you would no doubt be drawing my attention to the fact that we are debating the Question, That the Clause stand part of the Bill.
But I take up the point which my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) raised, which is a very valuable point, that here we have in the Clause a very cumbersome method. With the greatest respect to the Chief Secretary—I am in the same profession he is—he knows, as I do, that it is an absolute administrative impossibility to carry out. I do ask the Chief Secretary, not necessarily in his capacity as Chief Secretary but in his professional capacity, or his ex-professional capacity, would he like to be the accountant telling a unit trust or whoever it may be what it should put on the certificate? I can assure him that I would not like to be

the accountant who had to work it out. It is quite impossible. He knows, everybody else in the Committee knows, what will be put on these certificates, these bits of paper, as my hon. Friend called them, which, as he said, are going to be tossed about, given to people most of whom will never use them.
After all, most of the people who receive these bits of paper, these certificates, will not ever have to pay Capital Gains Tax. This is really the point we have to remember. It has been pointed out during this debate and in previous debates that the people who invest in these sorts of things are small people. The only big people who invest in investment trusts are insurance companies, pensions funds, charities. Insurance funds are comprised by millions and millions of policy holders—small people; charities are in any case exempt from the Capital Gains Tax; pensions funds also. So we are back in the position that we are going to have bits of paper flying backwards and forwards and given to people who, in 90 per cent. of the cases, will never be able to use them. Surely, this is not what the Chief Secretary wants? Even administratively, it is a difficulty.
We have just debated local authorities, and one of the arguments put up was that because local authorities found it so difficult to produce accounts of their trading activities and there was administrative hardship, we should exempt them from taxation. I cannot understand the logic of the Government in this. Surely, to put the responsibility on unit trusts to push out these certificates knowing that they are going to people who in 90 per cent. of the cases will not be using them is administratively a formidable task? I am sure the Chief Secretary would agree with me—personally agree with me—in saying that, frankly, this, as an administrative exercise, would be practically impossible.
We have had in the debate talk on the rate which is likely, the rate of Capital Gains Tax for these unit trusts and investment trusts. There is this division in the Committee. It is accepted that these two forms of saving methods, or instruments of saving, unit trusts and investment trusts, are mainly comprised of small people. Then, in logic there is no reason why we should give the benefit to the


rich man who can get his own portfolio investment, his own direct portfolio investment, and pays 30 per cent. It is no use the Chief Secretary saying, "If he sells within a year it will be added to his income."
The right hon. Gentleman knows, just as the hon. Member for Manchester, Cheethan (Mr. Harold Lever) knows, that rich men do not sell within the year. They know the law. They know that they can hold on and pay only 30 per cent. If they sell within the year, they are caught for Income Tax and Surtax. Transport Stock, to which my hon. Friend the Member for Horsham (Mr. Hordern) referred, may be sold but the holders will not pay the 30 per cent. Capital Gains Tax on the profits from them. They will get a capital gain free of tax.
On the other hand, small people who are not liable to pay any Capital Gains Tax will pay tax, not at 30 per cent., but at 35 per cent. or 40 per cent. We have not been able to discover

whether it is to be 35 per cent. or 40 per cent. Most of us work out our examples on the 40 per cent. basis because it is easier than working on a 35 per cent. basis. This is one of the things that we should get clear. We should know whether to work on the 40 per cent. basis, or the 35 per cent. basis.

We think that the Government have made a mistake in the rate. They have made a further mistake by adopting this cumbersome method of giving this so-called concession. They have genuinely tried to help unit trusts, but the attempt has mis-fired. For these two very good reasons, and because the differential between the Corporation Tax at 40 per cent. or 35 per cent. and the Capital Gains Tax at 30 per cent. will hit the small saver, I hope that my right hon. and hon. Friends will divide against the Clause.

Question put, That the Clause stand part of the Bill:—

The Committee divided: Ayes 144; Noes 131.

Division No. 182.]
AYES
[6.6 a.m.


Allaun, Frank (Salford, E.)
Fletcher, Sir Eric (Islington, E.)
McGuire, Michael


Alldritt, Walter
Fletcher, Raymond (Ilkeston)
McInnes, James


Allen, Scholefield (Crewe)
Floud, Bernard
Mackenzie, Gregor (Rutherglen)


Armstrong, Ernest
Foley, Maurice
Mackie, John (Enfield, E.)


Atkinson, Norman
Foot, Michael (Ebbw Vale)
MacMillan, Malcolm


Baxter, William
Freeson, Reginald
Mahon, Peter (Preston, S.)


Bence, Cyril
Garrett, W. E.
Mahon, Simon (Bootle)


Benn, Rt. Hn. Anthony Wedgwood
Garrow, A.
Manuel, Archie


Bennett, J. (Glasgow, Bridgeton)
George, Lady Megan Lloyd
Mapp, Charles


Binns, John
Gourlay, Harry
Mason, Roy


Bishop, E. S.
Gregory, Arnold
Maxwell, Robert


Blenkinsop, Arthur
Grey, Charles
Mayhew, Christopher


Boston, T. G.
Griffiths, Will (M'chester, Exchange)
Mellish, Robert


Bradley, Tom
Hamilton, James (Bothwell)
Mendelson, J. J.


Bray, Dr. Jeremy
Hamilton, William (West Fife)
Miller, Dr. M. S.


Brown, Hugh D. (Glasgow, Provan)
Hamling, William (Woolwich, W.)
Morris, Alfred (Wythenshawe)


Brown, R. W. (Shoreditch amp; Fbury)
Hannan, William
Mulley, Rt. Hn. Frederick (SheffieldPk)


Buchanan, Richard
Hattersley, Roy
Murray, Albert


Butler, Herbert (Hackney, C.)
Hazell, Bert
Norwood, Christopher


Butler, Mrs. Joyce (Wood Green)
Heffer, Eric S.
O'Malley, Brian


Callaghan, Rt. Hn. James
Herbison, Rt. Hn. Margaret
Oram, Albert E. (E. Ham, S.)


Coleman, Donald
Hobden, Dennis (Brighton, K'town)
Orbach, Maurice


Conlan, Bernard
Horner, John
Palmer, Arthur


Corbet, Mrs. Freda
Hughes, Emrys (S. Ayrshire)
Pannell, Rt. Hn. Charles


Crawshaw, Richard
Irving, Sydney (Dartford)
Parkin, B. T.


Crosland, Rt. Hn. Anthony
Jeger, Mrs. Lena (H'b'rn amp;St. P'cras, S.)
Pentland, Norman


Cullen, Mrs. Alice
Jenkins, Hugh (Putney)
Prentice, R. E.


Dalyell, Tam
Johnson, Carol (Lewisham, S.)
Pursey, Cmdr. Harry


Davies, G. Elfed (Rhondda, E.)
Johnson, James(K'ston-on-Hull, W.)
Rees, Merlyn


Davies, Ifor (Gower)
Jones, J. Idwal (Wrexham)
Reynolds, G. W.


Dell, Edmund
Jones, T. W. (Merioneth)
Richard, Ivor


Diamond, John
Kelley, Richard
Robertson, John (Paisley)


Dodds, Norman
Kerr, Mrs. Anne (R'ter amp; Chatham)
Sheldon, Robert


Doig, Peter
Lawson, George
Shore, Peter (Stepney)


Driberg, Tom
Ledger, Ron
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Duffy, Dr. A. E. P.
Lee, Rt. Hn. Frederick (Newton)
Silkin, John (Deptford)


Dunn, James A.
Lever, Harold (Cheetham)
Silverman, Julius (Aston)


Dunnett, Jack
Lipton, Marcus
Skeffington, Arthur


Edelman, Maurice
Loughlin, Charles
Slater, Mrs. Harriet (Stoke, N.)


Edwards, Robert (Bilston)
Mabon, Dr. J. Dickson
Small, William


English, Michael
McBride, Neil
Snow, Julian


Evans, Albert (Islington, S. W.)
McCann, J.
Steele, Thomas (Dunbartonshire, W.)


Fitch, Alan (Wigan)
MacDermot, Niall
Strauss, Rt. Hn. G. R. (Vauxhall)




Thomson, George (Dundee, E.)
Watkins, Tudor
Wyatt, Woodrow


Tuck, Raphael
Whitlock, William
Yates, Victor (Ladywood)


Varley, Erie G.
Wilkins, W. A.
Zilliacus, K.


Wainwright, Edwin
Williams, Mrs. Shirley (Hitchin)



Walden, Brian (All Saints)
Woodburn, Rt. Hn. A.
TELLERS FOR THE NOES:


Wallace, George
Woof, Robert
Mr. Joseph Harper and




Mr. William Howie.




NOES


Agnew, Commander Sir Peter
Glover, Sir Douglas
Monro, Hector


Alison, Michael (Barkston Ash)
Glyn, Sir Richard
More, Jasper


Allan, Robert (Paddington, S.)
Goodhew, Victor
Morrison, Charles (Devizes)


Allason, James (Hemel Hempstead)
Grant, Anthony
Munro-Lucas-Tooth, Sir Hugh


Anstruther-Gray, Rt. Hn. Sir W.
Gresham Cooke, R.
Murton, Oscar


Awdry, Daniel
Grieve, Percy
Neave, Airey


Baker, W. H. K.
Griffiths, Peter (Smethwick)
Noble, Rt. Hn. Michael


Barber, Rt. Hn. Anthony
Grimond, Rt. Hn. J.
Onslow, Cranley


Barlow, Sir John
Hall, John (Wycombe)
Osborn, John (Hallam)


Batsford, Brian
Hall-Davis, A. G. F.
Page, R. Graham (Crosby)


Berry, Hn. Anthony
Hamilton, Marquess of (Fermanagh)
Peel, John


Bessell, Peter
Hastings, Stephen
Percival, Ian


Bingham, R. M.
Hawkins, Paul
Peyton, John


Blaker, Peter
Heald, Rt. Hn. Sir Lionel
Pounder, Rafton


Box, Donald
Heath, Rt. Hn. Edward
Powell, Rt. Hn. J. E[...]noch


Boyle, Rt. Hn. Sir Edward
Hendry, Forbes
Price, David (Eastleign)


Brinton, Sir Tatton
Higgine, Terence L.
Prior, J. M. L.


Brown, Sir Edward (Bath)
Hirst, Geoffrey
Pym, Francis


Bruce-Gardyne, J.
Hobson, Rt. Hn. Sir John
Redmayne, Rt. Hn. Sir Martin


Buck, Antony
Hordern, Peter
Ridley, Hn. Nicholas


Buxton, Ronald
Hornby, Richard
Ridsdale, Julian


Carlisle, Mark
Hunt, John (Bromley)
Roots, William


Carr, Rt. Hn. Robert
Jenkin, Patrick (Woodford)
Scott-Hopkins, James


Channon, H. P. G.
Johnston, Russell (Inverness)
Sharples, Richard


Chataway, Christopher
Kerr, Sir Hamilton (Cambridge)
Shepherd, William


Chichester-Clark, R.
Kershaw, Anthony
Sinclair, Sir George


Clark, William (Nottingham, S.)
King, Evelyn (Dorset, S.)
Studholme, Sir Henry


Cordle, John
Kirk, Peter
Summers, Sir Spencer


Corfield, F. V.
Langford-Holt, Sir John
Taylor, Edward M. (G'gow, Cathcart)


Crawley, Aidan
Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)
Taylor, Frank (Moss Side)


Curran, Charles
Longbottom, Charles
Turton, Rt. Hn. R. H.


Dalkeith, Earl of
Longden, Gilbert
van Straubenzee, W. R.


Davies, Dr. Wyndham (Perry Barr)
Lubbock, Eric
Walder, David (High Peak)


Dean, Paul
MacArthur, Ian
Walker, Peter (Worcester)


Deedes, Rt. Hn. W. F.
Mackie, George Y. (C'ness amp; S'land)
Ward, Dame Irene


Eden, Sir John
McLaren, Martin
Webster, David


Elliott, R. W. (N'c'tle-upon-Tyne, N.)
Maclean, Sir Fitzroy
Whitelaw, William


Emery, Peter
Macleod, Rt. Hn. Iain
Wilson, Geoffrey (Truro)


Errington, Sir Eric
Marples, Rt. Hn. Ernest
Wise, A. R.


Eyre, Reginald
Mathew, Robert
Yates, William (The Wrekin)


Fell, Anthony
Maude, Angus
Younger, Hn. George


Fletcher-Cooke, Charles (Darwen)
Mawby, Ray



Fraser, Rt. Hn. Hugh (St'fford amp; Stone)
Maxwell-Hyslop, R. J.
TELLERS FOR THE NOES:


Gilmour, Ian (Norfolk, Central)
Maydon, Lt.-Cmdr. S. L. C.
Mr. Dudley Smith and


Gilmour, Sir John (East Fife)
Mitchell, David
Mr. Ian Fraser.

Clause 64.—(INSURANCE COMPANIES.)

6.15 a.m.

Mr. Maxwell: What about packing up now?

Mr. Peter Walker: I beg to move, Amendment No. 658, in page 81, line 1, after "business", to insert:
whether mutual or proprietary".
I am surprised to hear one or two hon. Members on the other side of the Committee say, "What about packing up now?" We realise that the Treasury Bench are getting very tired, but we hope that their supporters are not doing so also. We are pleased that, at this refreshing hour of the morning, we should be starting on this very important Clause, Clause 64—[HON. MEMBERS: "Speak

up."] We are about to discuss a Clause which affects almost every family in the country, a Clause concerning life assurance.
I am pleased to see that the Chief Secretary is to reply to this Amendment, because I had connections with the insurance industry for 17 years, and I started in his constituency. I must confess, with some regret, that at that time, alas, each lunch hour I obtained my sandwiches and coffee from the Co-op restaurant, and thus, possibly, assisted him in his political career.
The Amendment is an important one in that, as at present worded, the Clause could be taken to refer particularly to proprietary companies. Under Section 425 of the Income Tax Act, 1952, there


is a specific reference to both proprietary and mutual business. As the Committee will be aware, there are in this country many life offices which work on a mutual basis, many of them life offices of a substantial size, and also some small ones like the Police Mutual, operating for specific interests. I am sure that it was the intention of the Government that mutual offices should be included in this Clause, and I hope therefore that the Chief Secretary will be able to accept the Amendment.

Mr. Diamond: The hon. Member for Worcester (Mr. Peter Walker)—who looks extraordinarily well as a result of his Co-op sandwiches and coffee—has moved the Amendment in tones loud and clear, and I am very grateful to him for that. He has drawn attention to the fact that, in the existing legislation, the words are "whether proprietary or mutual". He prefers "whether mutual or proprietary". Neither is necessary, but the Amendment does nothing but adorn the Bill, and if it gives the hon. Gentleman pleasure and satisfaction then, having regard to the fact that he used to live in Gloucester, I will be only too delighted to give it to him.

Amendment agreed to.

Mr. Peter Walker: I beg to move Amendment No. 659, in page 81, line 14, to leave out "deduction" and to insert:
relief in respect of management expenses given".
I apologise for having spoken a little too loudly, but I thought there was need to waken up the Committee a little, and I am pleased that we are having at least that effect.
Once again, this Amendment deals with what is more of a drafting point. There is some thought that the present word "deduction" could refer to something other than management expenses. I believe that it is the intention of the Government that it should refer to management expenses, and I hope—perhaps far reasons other than that I lived in Gloucester—that this Amendment will also be acceptable to the Chief Secretary.

Mr. Diamond: What the hon. Gentleman describes is intended; it is included, so I am advised, not specifically but implicitly. Nevertheless, the words he has proposed do nothing but make the

already clear pellucidly clear, and on the grounds that the hon. Gentleman has had a good night's sleep and has come here fresh and cheerful—and we welcome the new mood he has brought with him—I am glad to give him this Amendment also.

Amendment agreed to.

Mr. Diamond: I beg to move Amendment No. 341, in page 81, line 25 at the end to insert:
The reference in paragraph 2(1) of Schedule 6 to this Act to computing income or profits or gains or losses shall not be taken as applying to a computation of a company's income for purposes of this subsection.
These words are sought to be added for the sake of clarity; they do nothing other than make clear what is the intention of the Clause. As I have already given the hon. Member two Amendments I thought that at least he might give me this one, but not only on those grounds—and I apologise for being facetious—but on the more solid grounds that were the word not there it might be thought, but wrongly, that because of the phrase "trading profits" capital gains which have not been taxed could be omitted and never be taxed at all. In order to avoid the possibility of its being alleged that capital gains are not to be taxed directly by the effect of certain words in the Clause, it is made clear, for the sake of certainty, that they do come into taxation once, not twice. I can give a longer description if the Committee would like it, but I hope that the Amendment will be acceptable.

Amendment agreed to.

Mr. Peter Walker: I beg to move Amendment No. 463, in page 82, line 4, to leave out "income" and to insert:
profits (as defined in section 42(4)(b))".
I am pleased at the progress we are making on the Bill. We have so far had two Amendments accepted. When we noticed what a difficult time the Treasury Bench was having with all the numerous Amendments they have had put down to clarify the Bill we thought we should do something.
This Amendment raises an important point, and applies particularly to overseas life funds administered by United Kingdom companies.
The Clause refers to Section 429 of the Income Tax Act, 1952, which provides special treatment for life companies administered for purely overseas policy holders. We presume that it is the intention of the Government that the provisions of the Clause should equally apply as in the Income Tax Act, 1952, and should apply not only to income but also to the chargeable gains that accrue. The purpose of the Amendment is to use the definition as in Clause 42(4,b) to include both income and chargeable gains. I presume that is the intention of the Government and I hope that they will also find the Amendment acceptable.

Mr. Diamond: The hon. Member has put the matter fairly but, to answer him, the Amendment goes a little wider than he intends. I think I could almost say that what he intends we intend too, but I do not want to be specfic about it. I will certainly undertake to bring in a suitable Amendment on the Report stage that I believe will really meet the point, if he will undertake to withdraw his Amendment.

Mr. Walker: In view of that undertaking, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Peter Walker: I beg to move Amendment No. 657, in page 83, line 10, at the end to insert:
and except under section 58 hereof.
This part of the Clause applies to treatment of franked income. Clause 58 lays out certain provisions regarding the treatment of franked income. We were concerned that the provisions of Clause 58 may not apply as far as this Clause is concerned and we therefore propose this Amendment.

Mr. Diamond: The hon. Member should have no anxiety about this. Clause 58 does apply and his Amendment is not necessary in order to achieve his purpose. I hope, therefore, that he will not feel disposed to press the Amendment.

Mr. Walker: On that undertaking, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Peter Walker: I beg to move Amendment No. 686, in page 83, line 42, at the end to add:

(9) It is hereby declared that the investments of a company carrying on the business of life assurance made in connection with such business and held at 6th April 1965 for the purpose of such business (together with any substitution therefor) shall not be chargeable assets.
I believe I am right in saying that it would be acceptable to the Chair to discuss at the same time Amendment No. 656, in page 83, line 42, at end add:
(9) Notwithstanding anything hereinbefore contained the chargeable gains accruing to a company carrying on a life assurance business shall be to the extent that they are allocated or reserved to its policy holders be charged to tax at three-fifths of the rate of capital gains tax chargeable in the case of an individual without regard to the provisions of section 20 hereof.

The Temporary Chairman: That would be in order.

Mr. Walker: These are two major Amendments that we on this side of the Committee would like the Government to accept.
I stated at the beginning of our discussion on the Clause how important was this general concept of life assurance and what a great deal of attention the Committee should be giving to it. It is a staggering fact that in Britain at present there are in existence something like 123 million life policies, plus 5 million people who enjoy life cover in group schemes.
The important factor about this great life assurance industry in Britain is that it provides particularly for people with smaller incomes. It is a fact that 110 million policies in Britain are transacted by industrial life companies on a door-to-door, weekly collection, basis.
Unless these two Amendments are accepted, those people using life assurance as a medium of saving will be at a distinct disadvantage. If I may first refer to Amendment No. 686, the purpose of this is to see that all those funds at present invested by life offices will not in future be subject to Capital Gains Tax through the medium of the Corporation Tax.
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The reason for doing this is the very real and good one that when a life office enters into a contract on a life policy it is guaranteeing the payment of a certain amount of money in return for the


premiums which will be paid over the years, it has to enter the contract, and, no matter what happens in the meantime, at the end of the 20 or 30 years or at the end of the lifetime of the person concerned, that sum of money has to be paid. If life offices were subjected to violently fluctuating taxation, they would be unable to enter these normal forms of life contract.
This is why successive Governments, both Socialist and Conservative, have over the years agreed to a fixed rate of tax for life offices, which has not varied from Budget to Budget. It has been a fixed and agreed rate of taxation for many years. One can imagine the effect of suddenly introducing a new tax. Special provision is made to safeguard the existing rate of Income Tax on the income of the life funds, but no such provision is made in regard to the imposition of Capital Gains Tax.
This will have a very real and important effect upon the life offices. It must be remembered that these offices have decided upon their investment policy in the light of the contracts that they have entered into. They have decided, for example, to be very heavy investors in the long-term end of the gilt-edged market. The Chancellor will be well aware of the very important rôle which the life offices play in the gilt-edged market, particularly with long-dated stocks. They invest in that type of security because they want to be certain of securing a certain amount of money at the end of a period of years when the gilt-edged stocks come to maturity.
If a new tax is suddenly imposed on their investment pattern, it means that on the contracts into which they have already entered they will suddenly be subjected to a tax which was completely unexpected. They cannot alter the terms of their contracts. They cannot say to all those insured for a policy of £1,000, "The Government are imposing a Capital Gains Tax upon us. At the end of the 20 years when your policy matures we shall pay you only £950." The life offices have given the existing contracts on the basis of believing and understanding that there was not a Capital Gains Tax in existence.
Our Amendment is a somewhat modest one. To cover this point fully one would need an Amendment saying that the

future investment of premiums upon contracts already entered into should be exempted in the same way, but there would be very considerable administrative difficulties about doing that. Therefore, our suggestion is that all the funds invested in the life funds of the life offices at 6th April should in future not be chargeable assets. This would mean that the life offices would be able to complete their contracts without the incidence of this tax.
I ask the Committee to recognise what will happen if the Amendment is not accepted. Given the fact that the life offices cannot in any way change their present contracts into which they have entered with the policy holders, the only way they can make amends for the adverse effect of the tax is to ensure that new people taking up contracts pay additional premiums or have reduced benefits which will not only make up for the Capital Gains Tax which their premiums will have to meet over the years but also meet the interest cost upon the existing policy holders that they will sustain before their contracts come to fruition. If the Amendment is not accepted, they will be imposing on future policy holders a very unfair burden in regard to Capital Gains Tax.
Besides Amendment No. 686, we have a very important Amendment, No. 656, which, Sir Harry, you said could be discussed with the other—

The Temporary Chairman (Sir Harry Legge-Bourke): Order. I think it might help the Committee if I were to say that the Chairman of Ways and Means has agreed to allow Amendment No. 656 to be discussed, but only on the understanding that it would be amended so that the words "at a rate not exceeding" were inserted before the word "three-fifths".

Mr. Walker: Thank you very much, Sir Harry. Those words will be perfectly acceptable to those of us who have sponsored this Amendment.
This Amendment seeks to ensure that the tax chargeable upon that part of the life fund which is allocated to the policy holders should be at the rate of three-fifths of the rate of the Capital Gains Tax chargeable to the individual. I suggest that the Committee will quickly see the


justice of the Amendment. As I have stated, the majority of policy holders in this country are people with small incomes. Those people, if they invested direct into the market other than through the media of life assurance, would pay at the maximum rate of Capital Gains Tax, at 30 per cent., but many of them would not pay any Capital Gains Tax at all.
Large numbers of individuals insured with the industrial life offices have little or no income. Many of these policies are connected with children. Many are on the wives. They are essentially family policies, with families on small incomes. Therefore, these people, if they invest other than through the media of life assurance, will pay no Capital Gains Tax at all, or at least a low rate of Capital Gains Tax, and even if they were paying the standard rate of Income Tax they would only pay Capital Gains Tax at the rate of 27½ per cent. Yet because these people choose to save through the media of life assurance, they are indirectly going to have imposed upon them a rate of 35 per cent. Capital Gains Tax. If the rate of Corporation Tax should be increased to 40 per cent. that rate will go up to 40 per cent. too.
The Government will find it very difficult to defend a situation in which a person paying 1s.
or 2s. a week on a life policy has imposed upon him a Capital Gains Tax of 35 per cent. or 40 per cent., whereas normally as individuals such persons would either pay no Capital Gains Tax at all or would pay at a much lower rate than this. Therefore, we have suggested the formula of three-fifths of the rate paid by the individual as our estimate of what the average rate would be for those persons who are policy holders.
The Treasury may have other statistics that will illustrate that the average rate of tax of the policy holders in this country is either higher or lower than the estimate that we give. We would find it acceptable to have a different figure than three-fifths inserted in the Amendment if statistically it could be shown that this figure is too high or too low. But we are endeavouring to show that basically those people who use life assurance as the media for saving will

pay a rate of Capital Gains Tax similar to what they will pay as individuals.
I must point out the hazards that the Government will face if they do not accept this Amendment. If they do not accept it by stating that in future the Capital Gains Tax on the life fund due to policy holders will be at the full rate of Corporation Tax, they will do one of two things. Either they will bring about a decline in the benefits of future life contracts, or they will increase premiums. Obviously neither of those things will be in the interests of the country.
We all know the main sort of benefits of life contracts. They are used particularly as far as pension provision is concerned. I do not think that any hon. Member wants those who provide for their pension by life assurance to have a higher rate of Capital Gains Tax imposed on them indirectly than they would if they invested as individuals. It provides for the emergency in the family; it provides for the sudden death; it provides for the widow and the children who are left. All Governments in the past have endeavoured to ensure by their taxation treatment of life assurance that life assurance is encouraged as a medium of saving and providing security in the family.
The Government, by their action in imposing Capital Gains Tax on these life funds at the full rate of Corporation Tax, are handicapping the benefits that these policies provide. I ask them to think of the very important r½le which the life assurance companies play in the provision of mortgages. About £800 million has been invested by British life offices for the direct provision of mortgages on private dwelling houses. It works out that about 2,000 houses in every constituency carry a mortgage provided by a life office. About another 2,500 homes in every constituency enjoy the security of what is called a mortgage protection policy which gives life cover for the repayment of a building society loan.
In future, if this capital gains structure persists, the premiums to be paid on those policies, either for direct mortgage repayment or for mortgage protection, will have to be increased. This will be another example of the Government adding to the already heavy burden of the person endeavouring to buy his home. They should already be distressed at the


heavy burden which they put on people endeavouring to buy a home of their own, but to add this further burden which must eventually lead to an increase in the cost of mortgage repayments through life assurance must strike people as being unfair and very unreasonable.
Also, the imposition of this tax at this high level will have a general adverse effect on the attractiveness of life assurance. This is a great medium of saving. The Chancellor of the Exchequer must be aware of this more than most people. Not only are Government stocks held so very substantially by the insurance companies, but many local authorities obtain their long-term finance from the life offices. A great degree of investment in industry takes place, and the President of the Board of Trade will say how willingly the insurance companies co-operated in providing long-term finance for British exporters. This must be a medium of saving which we wish to encourage.
We are not asking by these two Amendments that an extra concession should be given to life assurance. We are not asking for life assurance to be given mare favourable treatment than other forms of saving. We are asking, first, that in the case of those contracts already entered into by life offices the life offices shall be able to keep them because there will not be any change in the taxation of the investments already made; and, secondly, for future life contracts, we are asking that if the Government have to impose Capital Gains Tax it should be levied at a rate equivalent to the average rate applied to the individual and net a rate which will be at least double the average rate for the individual.
These Amendments are in the interests of the Chancellor of the Exchequer. They are certainly in the interests of important things like pension provision and house purchase and saving. I hope that the Government will have the good sense to accept both of them.

Mr. Grimond: I feel that the life offices have made out a case which certainly requires an answer in connection with the matters raised by these Amendments. However. I have certain doubts and certain questions which I should like to ask the Government arising from these proposals.
As has been clearly explained, the effect of one Amendment will be to relieve funds held at 6th April from the incidence of the Capital Gains Tax. The argument for that is that the insurance companies enter into contracts which may run for a long time and which they cannot alter. I accept that, but I am not quite sure that all types of insurance policies will be affected in the same way. I appreciate that the profitability of certain types of policies will be affected, but it can also be argued that many types of investment will be affected by the Capital Gains Tax and some will become less profitable.
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I suppose that the Government will need to be convinced that there is a special reason for exempting life policies from this form of tax, which will have wide repercussions on every type of investment and saving. There is a case for saying that the insurance companies are in a different position from the ordinary commercial enterprise because they cannot take avoiding action, so to speak, as regards contracts already entered into. What would be the result on different types of policies of accepting the Amendment and what would be the net gain or loss involved?
The other proposal, as I understand it, refers to the future and attempts to equalise the incidence of the Capital Gains Tax on people who take out insurances with the liability which they might incur if it were simply a case of Capital Gains Tax being levied on them as individuals. This seems a perfectly fair proposal. Perhaps the wording of the Amendment is not to the Government's liking, but I see no reason why they should not accept it in principle. I will not go over again all the reasons why. All hon. Members must be anxious to encourage this type of saving and to see that people who enter it are not penalised, since richer people are perhaps able to find other ways of saving, without having to pay the Capital Gains Tax at such a high rate.
The life assurance companies say that, for the purpose of meeting their liabilities, they must keep investments under continuous review. A shift froth one type of investment to another might, in this process, result in a capital gain, but,


they say, this is not what is usually regarded as a realised gain. They are frightened because such gains will become subject to the Capital Gains Tax. I do not know how far their fears are justified. I hope that the Chief Secretary will deal with this issue, since the companies and others have expressed concern over it and I understand that representatives of the companies have been to the Treasury about it.

Mr. Harold Lever: Although I have not given great study to this complicated Clause, as I understand the position, the insurance company and not the policy holder will pay the Capital Gains Tax on any realised capital gain. Does it not follow that the policy holder may get his policy gain, as it were, without directly or indirectly incurring even as much tax as hon. Gentlemen want him to pay?
There is then the question of new policy holders coming in and taking over investments from the insurance company, probably not realising that the investments were bought on behalf of the previous policy holders. Surely such a company would be able to pay out to its policy holders on the basis of the value of the assets held on their behalf because, in effect, there would be a transfer of assets without them coming within the ambit of the Capital Gains Tax. Would that not be the position? As I said, I have not had an opportunity to study the Clause. It would appear, however, that as long as new policy holders come in, then to the extent that they amount to at least the number being paid out, there would be little Capital Gains Tax to pay.
I suggest that hon. Gentlemen opposite are asking my right hon. Friend to make a so-called concession which would cost the policy holders a great deal of money. The right hon. Gentleman the Leader of the Liberal Party appeared to be supporting their request. To put it in another way, if the concession does not cost money, it means that the policy holder is getting a double concession: not only does he not pay Capital Gains Tax, very often, on the accretions to the value of the fund held on behalf of his policy but, by reason of a non-realisation within the meaning of the Bill, he has

the rate reduced for those occasions when there is some realisation.

Mr. Peter Walker: The hon. Gentleman should realise that the life offices will in future have to make a reserve for contingent Capital Gains Tax in the life fund. This is a real problem, and it means that, in all responsibility, they cannot start paying out moneys or bringing in new people to inherit those moneys without there being a constant contingent position in the life funds.

Mr. Lever: The hon. Gentleman says that they will have to make a contingent reserve, but the amount of that reserve may be much less, or should be much less, than the full amount of the Capital Gains Tax.
However, as most hon. Members are aware, I am not greatly excited with pleasure at the prospect of the Capital Gains Tax and I do not regard it as the answer to every financial maiden's prayer, but I am going on the assumption that we are to have one. It seems to me that the argument that what is proposed here will penalise people with policies is not correct. On balance, it will provide a further inducement to small people to make their investments by way of life policies because they will be rather better off as far as Capital Gains Tax is concerned than by way of any other investment medium. But that is only my understanding on a brief reading of the Clause.

Mr. Hugh Jenkins: Mr. Hugh Jenkins (Putney) I support my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) and urge my right hon. Friend not to accept the two Amendments which were put to us in such moving terms by the hon. Member for Worcester (Mr. Peter Walker). At one point, as he painted a picture of the children and widows trooping in, I thought that a little soft music might be appropriate to induce the mood which the hon. Gentleman was trying to convey.
The life assurance organisations are not investment organisations only. Their business is life assurance. As the right hon. Member for Orkney and Shetland, (Mr. Grimond) reminded us, there are various sorts of policies, and life assurance companies have full opportunity to make an assessment in the light of the


Capital Gains Tax. Most policies, whether they are paid for weekly at the door or whether they are large-scale policies, are with-profits policies, and it is quite possible for the life offices to make such adjustments as may be necessary. At the end of the life of the policy, the application of the Capital Gains Tax will be very tiny. With policies at an early stage, there is plenty of time to make necessary adjustments.
The investment of their funds is only one source of profit for the life assurance companies. There are many others, such as cautious actuarial calculations, and so on. I hope, therefore, that my right hon. Friend will not feel it necessary to give any assurances in response to these Amendments. They would not have the suggested effect of putting life assurance companies into an equal position relative to other forms of investment. They would put them in a preferential position, which would be entirely unjustified.

Mr. Diamond: The two sides of the Committee are at one in wishing to encourage saving in all its forms, and, of course, one of the most accepted and reliable forms is life assurance. It is for this reason that life assurance has been recognised by the State as having a special place. It has always had a special method of calculating tax and a special limitation on the rate of tax which it suffers. It pays at a pegged rate. We are all at one on that. The hon. Member for Worcester (Mr. Peter Walker) was anxious to single out life insurance for more favourable treatment than other forms of savings, but he did not make the case at all. I agree with what my right hon. Friend the Chancellor said in his Budget speech:
Life assurance companies occupy an intermediate position between these two classes. The investment income of their life funds is subject to Income Tax, but their gains from the realisation of securities, in effect, largely go tax free. I do not think it is right that this situation should continue in the context of the. Capital Gains Tax which is to apply quite generally; and I therefore propose that the gains of life assurance companies, both short-term and long-term, should be brought within its scope."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710. c. 247.]
The hon. Member opposite has not demonstrated why this form of saving, which is indirect saving, and not such a

pure form of saving as, for example unit or investment trusts, should receive special treatment. When a person pays a premium he is doing two things. Firstly, he is investing, and secondly he is paying for the cover against a risk.
If—and God forbid—the hon. Gentleman were to die tomorrow, having invested for one year he would find a very different situation than if he had paid a premium for life cover for one year.

Mr. Peter Walker: I do not think that that is a valid argument. The right hon. Gentleman is saying that there is an averaging out of actuarial calculations on the average span of life. But what happens is that a group of people share the risk dividend by paying for the risk which accumulates savings at a rate according to an actuarial table.

Mr. Diamond: There is an insurance element in it. It is not for me to say, nor am I competent to say, how a premium is dealt with; but a proportional amount is allocated to death cover. It certainly cannot be alleged that this form of saving should be preferred to other forms of saving. It might be said that there are other forms of saving which should be preferred. There is no reason why this should be preferred to unit or investment trusts.
The Amendment seeks to remove life assurances companies from the Capital Gains Tax; but, I am sorry, this is the kind of Amendment which the Government are not prepared to accept. It is quite clear that there is no double taxation. The policy holder is not to be taxed but the company will be, and it will certainly pay more tax than it has done hitherto. This is merely a fact which reflects the fact that there have been capital gains, and this is the answer to the right hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond). Certainly switching will result in Capital Gains Tax being attracted. The fact is that capital gains have been made which so far have not borne tax and it would certainly be wrong to single out one form of capital gain and exempt it from the charge. I cannot offer the hon. Gentleman any encouragement as far as that Amendment is concerned.
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The other Amendment deals with the question of the rate, and attempts to look through the funds to the individual. I shall not impress the Committee if I say I would not accept that principle anyway, because the Committee is not impressed by arguments of tax purity. But I would say that one has to accept that a corporation should pay Capital Gains Tax as part of general income unless the contrary can be demonstrated. The contrary cannot be demonstrated here and it is wrong for the hon. Member for Worcester to say that if this benefit were received by an individual it would inevitably have a lower rate of tax. It would attract a different rate, more or less.
If a short-term capital gain—and there will be switches within 12 months in all forms of savings to meet circumstances—were received by an individual, it might attract Surtax or Income Tax at a much higher rate than the 35 per cent. that would be attracted here. It would be idle to conjecture which would be more likely for the individual. The hon. Gentleman is entitled to say that it would be more likely to be a long-term gain. I merely say that it may be one or the other. In terms of cost the Amendments would be reasonably costly, though perhaps not greatly so.
I was attracted by the argument of my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), but it will be difficult to demonstrate either that what he says is right or that what I say is right—namely, that Amendment No. 656 would cost the Revenue £7½ million and Amendment No. 688 would cost about £16 million—a total of £23½ million.

Mr. Harold Lever: I realised that I was making a bad point and withdrew it. Right hon. and hon. Members opposite were asking for a double concession. I was wrong in suggesting that this proposal would work to reduce tax for the policy holder. I suggested it would not cost as much as before because, when the gain was realised when the policy was paid out, he was charged at 33⅓ per cent.

Mr. Diamond: I realise that.

Mr. Peter Walker: Perhaps the Chief Secretary would explain the basis of his calculations as to cost and what period

they apply to. The rate of the tax has not been finally fixed yet but now he suddenly comes out with these two figures. The Government do not expect for 12 or 15 years to reach the estimate of the Capital Gains Tax that they made in the Budget but now say that these Amendments would cost £23½ million. When would they cost that?

Mr. Diamond: I think there is some confusion here. This is Corporation Tax, paid by a company in respect of its capital gains. All capital gains or other kinds of gains are assessed on the company in one sum, and that is the Corporation Tax.

Mr. Peter Walker: On what basis has the right hon. Gentleman been able to calculate the saving on capital gains over a 12–month period in investment with life assurance companies?

Mr. Diamond: I can only say that I am not prepared to give my own certificate. I do not claim that I worked them out myself. I do not think I would have the ability to do so and it would not be appropriate to my responsibilities. What I can say is that I am advised by the Revenue, which goes to considerable lengths to try to give this information for every Amendment because the Committee generally likes to know what the cost of accepting Amendments would be. Its best estimate is the figure I have given for a full year in respect of Corporation Tax. The hon. Gentleman the Member for Worcester is quite right. The first year of Capital Gains Tax is estimated to produce only £12½ million all told.
There is one other point. I do not want it to be thought that we are not conscious of the case that a life assurance contract is a long-term contract. It is entered into on a variety of assumptions, one of which may have been, some time ago, that there was not going to be a tax payable in respect of capital gains. Nevertheless, it is not right to say that an insurance company looks solely to the kind of taxation which will have to be suffered in the years ahead. There are a number of things which affect it and the major thing the insurance company must look to is the estimated rate of interest over the years ahead, which is liable to fluctuation in a way which affects funds in a much more solid way


than the Capital Gains Tax on any capital gains that happen to be made from time to time. I do not want this to be taken out of perspective.
There are all sorts of terms which insurance companies entering into long-term contracts have to take into account. While it might be in a particular case, as a result of paying Capital Gains Tax, that a certain policy holder would receive a smaller pension than he might otherwise receive, this is something which is inevitable if a tax is to be spread fairly among all Her Majesty's subjects. I could not possibly accept these Amendments as they would prefer insurance as a form of saving to other forms of saving. I hope that the Committee will not feel it necessary to press them.

Mr. Peter Walker: I must immediately sate my disappointment with the reply of the Chief Secretary and I must also emphasise to the Committee, before they decide on this, the damage that is being done in the Finance Bill to the life offices. The case made by the Chief Secretary was that the position of the life offices was not going to be any worse than any other form of saving. As he is well aware we have been opposed throughout to the attitude he has taken on this. On behalf of 123 million policy holders in this country, we strongly object to him saying that, because a life assurance company invests their savings on their behalf, he is going to impose upon them a 35 per cent. Long-term Capital Gains Tax. He is going to impose upon their funds, and we particularly worded this Amendment to apply strictly to the funds for the benefit of the policy holder. The Government have decided to impose this tax upon those people.
The figures are alarming. If the figures are correct, what the Chief Secretary has said is that for each year the policy holders pay their industrial life policies their profits will deteriorate as a result of the action of the Government. The hon. Gentleman the Member for Putney (Mr. Hugh Jenkins) mentioned this subject. He will be delighted to tell this to the policy holders of Putney.

Mr. Hugh Jenkins: The hon. Gentleman the Member for Worcester (Mr. Peter Walker) is setting up a proposition

in terms so grossly exaggerated as to be absolutely ludicrous. The impact of this upon the individual policy holder, particularly of the small type of policy, is going to be so infinitesimal that it will not be noticed.

Mr. Walker: The hon. Member himself stated earlier that the way companies could adjust this was by adjusting their profits, and I was following the logic of his remarks.
If this were done, these Amendments working out, as they do, to £23½ million a year, if most of the policies were without profits, which they are not—then O.K., it would be £23½ million a year off the profits on those policies. That is the position the Government are pursuing.
I would remind the Committee that there has been a series of blows at the life offices throughout this Bill. First of all, the basis of valuation, calculating Capital Gains Tax from 5th April, is a basis which inflates the value of existing funds; Corporation Tax will result in lower dividends being paid to the life offices and this will have a very considerable impact on policies in the future; now Capital Gains Tax applied to the life offices in this way, applied at a rate above the rate applying to the individual, will cause hardship.
It is all very well for the Chief Secretary to say that he realises that life policies are generally long-term contracts, but there are variable contracts, and it is reasonable to vary, he says, the rate of Income Tax of life offices. All Governments have accepted the fact that it is unreasonable to vary the rate of Income Tax for life offices—to vary it above a certain level. Yet now the Government decide, not only to impose a level of Income Tax which is agreed to be paid, but also to impose another tax, Capital Gains Tax through Corporation Tax. The effect is exactly the same as not pegging Income Tax. The effect is to impose an unexpected extra burden of tax on life offices. This will affect, I regret to say, premiums, and the benefits of policy holders throughout the country, and those repaying mortgages through life assurance. For these reasons, I must ask my hon. Friends to divide the Committee.

Question put, That those words be there added:—

The Committee divided: Ayes 131, Noes, 144.

Division No. 183]
AYES
[7.12 a.m.


Agnew, Commander Sir Peter
Glover, Sir Douglas
Monro, Hector


Alison, Michael (Barkston Ash)
Glyn, Sir Richard
Morrison, Charles (Devizes)


Allan, Robert (Paddington, S.)
Goodhew, Victor
Munro-Lucas-Tooth, Sir Hugh


Allason, James (Hemel Hempstead)
Grant, Anthony
Murton, Oscar


Anstruther-Gray, Rt. Hn. Sir W.
Gresham Cooke, R.
Neave, Airey


Awdry, Daniel
Grieve, Percy
Noble, Rt. Hn. Michael


Baker, W. H. K.
Griffiths, Peter (Smethwick)
Onslow, Cranley


Barber, Rt. Hn. Anthony
Grimond, Rt. Hn. J.
Osborn, John (Hallam)


Barlow, Sir John
Hall, John (Wycombe)
Page, R. Graham (Crosby)


Batsford, Brian
Hall-Davis, A. G. F.
Peel, John


Berry, Hn. Anthony
Hamilton, Marquess of (Fermanagh)
Percival, Ian


Bessell, Peter
Hastings, Stephen
Peyton, John


Bingham, R. M.
Hawkins, Paul
Pounder, Rafton


Blaker, Peter
Heald, Rt. Hn. Sir Lionel
Powell, Rt. Hn. J. Enoch


Box, Donald
Heath, Rt. Hn. Edward
Price, David (Eastleigh)


Boyle, Rt. Hn. Sir Edward
Hendry, Forbes
Prior, J. M. L.


Brinton, Sir Tatton
Higgins, Terence L.
Pym, Francis


Brown, Sir Edward (Bath)
Hirst, Geoffrey
Redmayne, Rt. Hn. Sir Martin


Bruce-Gardyne, J.
Hobson, Rt. Hn. Sir John
Ridley, Hn. Nicholas


Buck, Antony
Hordern, Peter
Ridsdale, Julian


Buxton, Ronald
Hornby, Richard
Roots, William


Carlisle, Mark
Hunt, John (Bromley)
Scott-Hopkins, James


Carr, Rt. Hn. Robert
Jenkin, Patrick (Woodford)
Sharples, Richard


Channon, H. P. G.
Johnston, Russell (Inverness)
Shepherd, William


Chataway, Christopher
Kerr, Sir Hamilton (Cambridge)
Sinclair, Sir George


Chichester-Clark, R.
Kershaw, Anthony
Smith, Dudley (Br'ntf'd amp; Chiswick)


Clark, William (Nottingham, S.)
King, Evelyn (Dorset, S.)
Studholme, Sir Henry


Cordle, John
Kirk, Peter
Summers, Sir Spencer


Corfield, F. V.
Langford-Holt, Sir John
Taylor, Edward M. (G'gow, Cathcart)


Crawley, Aidan
Lloyd, Rt.Hn. Geoffrey(Sut'nC'dfield)
Taylor, Frank (Moss Side)


Curran, Charles
Longbottom, Charles
Turton, Rt. Hn. R. H.


Dalkeith, Earl of
Longden, Gilbert
van Straubenzee, W. R.


Davies, Dr. Wyndham (Perry Barr)
Lubbock, Eric
Walder, David (High Peak)


Dean, Paul
MacArthur, Ian
Walker, Peter (Worcester)


Deedes, Rt. Hn. W. F.
Mackie, George Y. (C'ness amp; S'land)
Ward, Dame Irene


Eden, Sir John
McLaren, Martin
Webster, David


Elliott, R. W. (N'c'tle-upon-Tyne, N.)
Maclean, Sir Fitzroy
Whitelaw, William


Emery, Peter
Macleod, Rt. Hn. Iain
Wilson, Geoffrey (Truro)


Errington, Sir Eric
Marples, Rt. Hn. Ernest
Wise, A. R.


Eyre, Reginald
Mathew, Robert
Yates, William (The Wrekin)


Fell, Anthony
Maude, Angus
Younger, Hn. George


Fletcher-Cooke, Charles (Darwen)
Mawby, Ray



Fraser, Rt. Hn. Hugh (St'fford amp; Stone)
Maxwell-Hyslop, R. J.
TELLERS FOR THE NOES:


Gilmour, Ian (Norfolk, Central)
Maydon, Lt.-Cmdr. S. L. C.
Mr. Ian Fraser and


Gilmour, Sir John (East Fife)
Mitchell, David
Mr. Jasper More.




NOES


Allaun, Frank (Salford, E.)
Davies, Ifor (Gower)
Hamling, William (Woolwich, W.)


Alldritt, Walter
Dell, Edmund
Hannan, William


Allen, Scholefield (Crewe)
Diamond, John
Harper, Joseph


Armstrong, Ernest
Dodds, Norman
Hattersley, Roy


Atkinson, Norman
Doig, Peter
Hazell, Bert


Baxter, William
Driberg, Tom
Heffer, Eric S.


Bence, Cyril
Duffy, Dr. A. E. P.
Herbison, Rt. Hn. Margaret


Benn, Rt. Hn. Anthony Wedgwood
Dunn, James A.
Hobden, Dennis (Brighton, K'town)


Bennett, J. (Glasgow, Bridgeton)
Dunnett, Jack
Horner, John


Binns, John
Edelman, Maurice
Howie, W.


Bishop, E. S.
Edwards, Robert (Bilston)
Hughes, Emrys (S. Ayrshire)


Blenkinsop, Arthur
English, Michael
Irving, Sydney (Dartford)


Boston, T. G.
Evans, Albert (Islington, S.W.)
Jeger, Mrs. Lena (H'b'namp;St.P'cras, S.)


Bradley, Tom
Fitch, Alan (Wigan)
Jenkins, Hugh (Putney)


Bray, Dr. Jeremy
Fletcher, Sir Eric (Islington, E.)
Johnson, Carol (Lewisham, S.)


Brown, Hugh D. (Glasgow, Provan)
Fletcher, Raymond (Ilkeston)
Johnson, James (K'ston-on-Hull, W.)


Brown, R. W. (Shoreditch amp; Fbury)
Floud, Bernard
Jones, J. Idwal (Wrexham)


Buchanan, Richard
Foley, Maurice
Jones, T. W. (Merioneth)


Butler, Herbert (Hackney, C.)
Foot, Michael (Ebbw Vale)
Kelley, Richard


Butler, Mrs. Joyce (Wood Green)
Freeson, Reginald
Kerr, Mrs. Anne (R'ter amp; Chatham)


Callaghan, Rt. Hn. James
Garrett, W. E.
Ledger, Ron


Carmichael, Neil
Garrow, A.
Lee, Rt. Hn. Frederick (Newton)


Coleman, Donald
George, Lady Megan Lloyd
Lever, Harold (Cheetham)


Conlan, Bernard
Gourlay, Harry
Lipton, Marcus


Corbet, Mrs. Freda
Gregory, Arnold
Loughlin, Charles


Crawshaw, Richard
Grey, Charles
Mabon, Dr. J. Dickson


Cullen, Mrs. Alice
Griffiths, Will (M'Chester, Exchange)
McBride, Neil


Dalyell, Tam
Hamilton, James (Bothwell)
McCann, J.


Davies, G. Elfed (Rhondda, E.)
Hamilton, William (West Fife)
MacDermot, Niall




McGuire, Michael
Oram, Albert E. (E. Ham, S.)
Steele, Thomas (Dunbartonshire, W.)


McInnes, James
Orbach, Maurice
Strauss, Rt. Hn. G. R. (Vauxhall)


Mackenzie, Cregor (Rutherglen)
Palmer, Arthur
Thomson, George (Dundee, E.)


Mackie, John (Enfield, E.)
Pannell, Rt. Hn. Charles
Tuck, Raphael


MacMillan, Malcolm
Parkin, B. T.
Varley, Eric G.


Mahon, Peter (Preston, S.)
Pentland, Norman
Wainwright, Edwin


Mahon, Siman (Bootle)
Prentice, R. E.
Walden, Brian (All Saints)


Manuel, Archie
Pursey, Cmdr. Harry
Wallace, George


Mapp, Charles
Rees, Merlyn
Watkins, Tudor


Mason, Roy
Reynolds, G. W.
Whitlock, William


Maxwell, Robert
Richard, Ivor
Wilkins, W. A.


Mayhew, Christopher
Robertson, John (Paisley)
Williams, Mrs. Shirley (Hitchin)


Mellish, Robert
Sheldon, Robert
Woodburn, Rt. Hn. A.


Mendelson, J. J.
Shore, Peter (Stepney)
Woof, Robert


Miller, Dr. M. S.
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Wyatt, Woodrow


Morris, Alfred (Wythenshawe)
Silkin, John (Deptford)
Yates, Victor (Ladywood)


Mulley, Rt. Hn. Frederick (SheffieldPk)
Silverman, Julius (Aston)
Zilliacus, K.


Murray, Albert
Skeffington, Arthur



Norwood, Christopher
Small, William
TELLERS FOR THE NOES:


O'Malley, Brian
Snow, Julian
Mr. George Lawson and




Mrs. Harriet Slater.

Clause, as amended, ordered to stand part of the Bill.

Mr. Heath: I beg to move,
That the Chairman do report Progress and ask leave to sit again.
Hon. Members on this side of the Committee are prepared to carry on examining with the utmost care and seriousness every one of the propositions—[Interruption.] With great respect, the Under-Secretary of State for Scotland has not been here, and does not know—

The Under-Secretary of State for Scotland (Dr. J. Dickson Mabon): Will the right hon. Gentleman withdraw? I have been in the Chamber the whole time.

Mr. Heath: If the hon. Member says that he has been in the Chamber the whole time I accept it. I have been here for the greater part of the time. I move this Motion in order to ask the Chancellor what his intentions are. The Committee has now been sitting for nearly 16 hours, and during that time it has made considerable progress. This is not the best way in which the Committee should consider a Finance Bill. As the Government are unable to provide the Committee with the time to examine this Bill during the normal hours of sitting of the House, it is necessary for the Committee to sit throughout the night and for as long as 16 hours. If the Government are unable to provide time at the normal time of day, I suggest that the Committee will have to go on sitting continually like this, and the country will be able to realise the ghastly mess into which the Government have got themselves—[HON. MEMBERS: "Oh."]—so

that they have to ask the Committee to go on sitting at this time.
The result, of course, has been showing itself in the effect that we saw yesterday afternoon, when we started these debates. We later had a better period, but, during the night, we had a recurrence of this unpleasant phenomenon. It would be of value to the Committee if we could avoid this, which we wish to do, and that is another reason that the Committee should continue its business at a proper hour. In order that the Chancellor may indicate how long he wants the Committee to go on sitting before the next day's business begins, I move this Motion and invite the Chancellor to state his intentions.

Mr. Callaghan: The right hon. Member for Bexley (Mr. Heath) says that we have made progress. This is true. Though I should not like to hold an inquest on the proceedings of the last 16 hours, because I do not think that it would be very profitable, I think that we could make a little more progress. However, I am anxious to set a term to it, because a very important Bill will be debated this afternoon—the Highland Development (Scotland) Bill—which I think should be discussed, and I should like hon. Members to have some rest before then. Looking to the future progress, there are two very important Amendments which I think should be taken. One is in the name of the right hon. Member for Orkney and Shetlands (Mr. Grimond), No. 650, in Clause 66, page 85, line 46, to leave out from "1952" to the end of Clause and to add
the building society shall not be liable to pay corporation tax on its profits".


The other, No. 356, in Clause 69, page 89, line 33, to leave out "fifteen" and to insert "twenty-five" is in the name of the hon. Member for Woking—

Mr. W. R. van Straubenzee: —ham.

Mr. Callaghan: I do not know whether or not the hon. Member is inviting us to go and get our breakfast.
I think that we should take these two Amendments. They are the only two substantive Amendments which are in dispute, because those on Clause 66 are by arrangement with the building societies. If the Committee found it agreeable to accept such an arrangement, I would suggest that, as the others are to give effect to undertakings which I gave on behalf of the close companies, we could finish—because these would be the only two Amendments—at the end of Clause 71, and that we then start on Clause 72 on Monday. That would enable the right hon. Gentleman to start in at a very early date on his major Amendment about 60 or 40 per cent. for the purpose of distribution. If that would commend itself to the Committee, we could then make some reasonably rapid progress and feel that we had done a good day's work.

Mr. Heath: I thank the Chancellor for indicating his intentions. I can see the disappointment on his supporters' faces that he has not maintained his original intention—which one of his hon. Friends shouted to me just now—of getting to Clause 74. The Chancellor has shown a much greater sensitivity to the wishes of the Committee in not asking it to reach Clause 74. He has suggested that we should get as far as Clause 71. I should point out to the Chancellor that both the Amendment of the right hon. Member the leader of the Liberal Party, Amendment No. 650, and that in the name of my hon. Friend the Member for Woking-ham (Mr. van Straubenzee) are important Amendments. They will require considerable debate. I would suggest to the Committee that we should now try to make further progress and deal with these two important Amendments and see whether it is possible to make the further progress for which the Chancellor has asked towards Clause 71.
Therefore, I beg to ask leave to withdraw the Motion.

Motion, by leave, withdrawn.

Clause 65.—(INDUSTRIAL AND PROVIDENT SOCIETIES.)

7.30 a.m.

Mr. Diamond: I beg to move Amendment No. 611, in page 84, line 13, to leave out "one month" and to insert "three months".
This Amendment has been tabled to accommodate the Co-operative societies, which are required to make certain returns under the Clause and which have made representations that the one-month period prescribed would not be entirely adequate. A period of three months is therefore suggested instead.

Mr. David Price: We are grateful to the Chief Secretary for that explanation, but I should like a little more information as the Amendment seems to amend what is in fact an Amendment. Subsection (2) of this Clause itself seeks to amend subsection (4) of Section 443 of the Income Tax Act, 1952. In that subsection (4), no period of time was laid down—returns had to be made to the Revenue by 1st May in each year. In this Clause, which the Chief Secretary now seeks to amend, the Government moved over from the date of 1st May to giving industries and provident societies
… one month after the end of any accounting period for corporation tax …".
Presumably, the intention was to bring industrial and provident societies into line with the same rules relating to the accounting period as applied to companies under Clause 47.
I assume that to be the reason, but it is interesting to observe that in extending the period from one month to three months and giving the societies freedom, as I understand it, to choose the appropriate accounting period, under the Provident and Friendly Societies Act of this year the time by which, normally, a registered society has to make its returns to the Chief Registrar is not later than 31st March in each year. As the general returns of the societies include fairly substantial accounts—as can be seen by Section 37 of this year's Act—would it not have been more convenient for all the societies concerned to have had the same period for the purposes of taxation? Perhaps the Chief Secretary will let us have his observations on that idea.

Mr. Diamond: As I have already indicated, I understand that the proposed arrangements resulted from representations made by the societies themselves, from which I would assume, although I do not know, that they are, by and large, acceptable to them. However, I see the force of the hon. Gentleman's suggestion, and if he will give me the opportunity to look into it. I will be very glad to do so.

Amendment agreed to.

Mr. Diamond: I beg to move, Amendment No. 696, in page 85, line 14, at the end to insert:
(8) Where in accordance with a scheme approved under section 5 of the Housing Act 1964 the Housing Corporation acquires from a housing society the society's interest in all the land held by the society for carrying out its objects, or where after the Housing Corporation has so acquired from a housing society all the land so held by it the Corporation disposes to a single housing society of the whole of that land (except any part previously disposed of or agreed to be disposed of otherwise than to a housing society), together with all related assets, then both parties to the disposal of the land to the Housing Corporation or, as the case may be, by the Housing Corporation shall he treated for purposes of corporation tax in respect of chargeable gains as if the land and any related assets disposed of therewith (and each part of that land and those assets) were acquired from the one making the disposal for a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the one making the disposal.
The purpose of the Amendment is to deal with the particular difficulty which has arisen in a very narrow sphere. Representations have been made to us that there would be difficulty with housing societies which get into trouble, as sometimes happens. It is normal for them to amalgamate themselves or be taken over by another society. In such cases, no Capital Gains Tax arises. But where there is a situation where a society in difficulties could not be taken over because there is no suitable recipient—no other society that can suitably take it over—one has to have an organisation to hold it until it can be added to another society. There is then a double transfer. In the present form of the Bill it is not provided that there shall be exemption from Capital Gains Tax through that transfer.
The purpose of the Amendment is merely to make it possible for such a situation to be catered for without a

housing society having any of its funds reduced in the way that would happen if it was amalgamated or taken over by another society in the ordinary way. I hope that with that explanation the Committee will feel that this accords with what everybody desires. I have no doubt that the drafting gives effect to it.

Mr. David Price: I am sure that we on this side of the Committee welcome the Amendment. I think we have had another example of points coming up after the Bill has been drafted. As I understand it, subsection (6) of the Clause endeavours to maintain and carry on, with regard to the new Corporation Tax, the privileges dispensed to the housing associations in terms of Section 43 of the Finance Act, 1963.
When one looks at the situation that was envisaged under Section 5 of the Housing Act, 1964, we find that the Housing Corporation comes in and buys back the land and, if necessary, related assets of those housing associations which have run into difficulties or are generally considered to be failing. Subsection (6), as it was drafted in the Bill, was inadequate to deal with the situation.
Subsection (6) deals with the relationship between a housing association and its tenants and members. This Amendment, as I understand it, is dealing with transfer—the sale of the assets back to the Housing Corporation. I think that the Committee should be clear that although it will not be subject to Corporation Tax as a result of this Amendment, if it is carried, the housing association will still be subject to Capital Gains Tax. I hope that the Chief Secretary will correct me if I am wrong. Looking back over our discussions on the Capital Gains Tax, I do not think we mentioned this subject. When I assume that the housing association would be subject to this tax, I may be wrong and I hope the Chief Secretary will clarify this. At the moment, I cannot see how the housing association would be relieved of Capital Gains Tax.
May I finally make a point that in the drafting of this new subsection (8), the intention is not quite clear. I ask the Treasury Bench why, instead of the very elaborate wording and double negative in the latter part of the subsection, one cannot have simple words saying that


these deals shall not be chargeable to Corporation Tax? At the moment the subsection reads:
… both parties to the disposal of the land to the Housing Corporation or, as the case may be, by the Housing Corporation shall be treated for purposes of corporation tax in respect of chargeable gains as if the land and any related assets disposed of therewith … were acquired from the one making the disposal for a consideration of such amount as would secure that on the disposals neither a gain nor a loss would accrue to the one making the disposal.
Would it not be easier to say that it would not be chargeable to Corporation Tax?

Mr. Diamond: The first question related to the Amendment and the second to the Clause. Dealing first with the Clause, I think I am right in saying that because of its mutuality this is not an organisation which would bear Capital Gains Tax. Therefore, the answer to the question is, no. What the Amendment provides is that with a transfer of the kind that we are considering to a housing association to be held until another housing association can amalgamate with it or take it over there is no Capital Gains Tax arising because the transaction takes place in such a form that none would arise, and the wording is merely to give effect to that. I doubt if we could have clearer and simpler wording; it makes the position clear. The hon. Gentleman fully understood it, and I am sure he would feel that most people would understand it. Perhaps in the circumstances—although it is only courteous for me to say, as I do, that I will look at the words to see if they can be reduced in volume, which I think is what the hon. Gentleman is after—I should say that I think they are clear and the meaning is clear.

Amendment agreed to.

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Hendry: Many people regard the Clause with very mixed feelings. It seems to be an example of the partiality of the Government in encouraging any sort of Socialist trading and discouraging private enterprise. I do not know what happens in the south of England but I know what happens in the north of Scotland—and has been happening for years. It is not a case of a little co-

operative society setting up and requiring tax advantages. The great co-operative organisations based in Glasgow and Manchester are deliberately setting up shops in villages in opposition to privately-owned shops. A great deal of disquiet has been caused by their coming along and trading with tax advantages which are not available to ordinary people.
It is vastly unfair to have an organisation, which may be a very large one, carrying on trading throughout the country, carrying on a banking business and an insurance business, which, simply because it is incorporated under one Act of Parliament, can have advantages which are denied to trading organisations on a very much smaller scale which happen to be incorporated under the Companies Acts. It is completely illogical that the Clause should begin by providing that the distribution, or what would be the distribution in the case of any ordinary incorporation, is not a distribution at all in the case of such an incorporation as is mentioned in the Clause.
If it were confined to share interest there might be some sense in it. One might have the idea of people with their shillings and pounds setting up a small society in a village and getting some tax relief on their small share interest. But that is not happening. Branches are being set up in country places by the great central institutions, and they are financed not by the shares and capital of the customers in the villages but by loan capital provided from Glasgow, Manchester and other places far away with no local connection. The Clause seeks to give certain relief and benefits to loan capital of that type because loan interest is specifically mentioned. I think that these advantages enjoyed by these great organisations should come to an end. and that they should suffer tax in the same way as any other of Her Majesty's citizens.
7.45 a.m.
I am very concerned about this Clause, and in particular subsection (7). I may be particularly stupid, but I cannot think what it means, except that there will be some tremendous advantage given to these co-operative organisations. The subsection says:
(7) If in the course of, or as part of, a union or amalgamation of two or more industrial and provident societies, or a transfer


of engagements from one industrial and provident society to another, there is a disposal of an asset by one society to another, both shall be treated for purposes of corporation tax in respect of chargeable gains as if the asset were acquired from the one making the disposal far a consideration of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the one making the disposal.
That seems to me to be an extremely serious thing, that one society, possibly a branch of one of the great wholesale societies, might make a substantial profit and at some stage or other will dispose of that profit, possibly making the disposal to one of its constituent societies. That society will make a profit, or do something tantamount to making a profit, without suffering any tax at all. It will dispose of that profit to some constituent society and no Corporation Tax will arise at any point.
The excuse for this may be mutuality of trading, and if there is mutuality of trading it seems to me that neither society will suffer either Corporation Tax or Capital Gains Tax. I hope the right hon. Gentleman will explain this to me, if that is not the true intent and meaning of the Clause. If this sort of thing happens and one society transfers assets or cash to another, there might be a complete round robin. The assets and cash might come back to where they started, and by means of a whole series of "fiddles" the society might get out of paying Corporation Tax and Capital Gains Tax. I admit that I am not very clever in these financial transactions, but ii seems to me that that is precisely what is intended.
I am extremely suspicious of the Clause, because it seems to me that the Government are trying to confer on these co-operative institutions advantages which are denied to any other trading organisation. I may be wrong; if I am. I hope the right hon. Gentleman will explain where I am wrong.
I now want to ask two questions. The first question, which is of great interest to many people, particularly small traders, is: how much is the Revenue going to lose by way of tax as a result of the special provisions in subsections (1) and (2)? Under subsection (1) societies are permitted to deduct distributions, or what would be distributions, from their profits for the purposes of Corporation

Tax, and under subsection (2) there is a certain relief to members, who might be member societies for that matter, up to £15 in any one year either on loan interest or share interest. In other words, how much of a subvention is being given to these societies which are being specially favoured in comparison with small traders?
My second question is what will subsection (7) cost the Treasury where one society can transfer assets to another society without suffering either Corporation Tax or Capital Gains Tax?

Mr. David Price: I appreciate the concern of my hon. Friend the Member for Aberdeenshire, West (Mr. Hendry), but, as I interpret the Clause, it attempts to continue in respect of Corporation Tax the tax privileges which have been accorded for a very long time to industrial and provident societies. They are to be found in Sections 442 and 443 of the Income Tax Act, 1952, which is current legislation. But it also continues the privileges accorded to housing associations, which, I understand, were originally accorded under Section 43 of the Finance Act, 1963. I should have thought that these two aims would meet with the Committee's general approval, because they have certainly met with the approval of our predecessors going back a very long way in the history of this Committee.
My hon. Friend the Member for Aberdeenshire, West is right to direct attention to the fact that where Parliament has bestowed, and is continuing to bestow, tax privileges on industrial and provident societies, we should, first, keep under review the current activities of these societies to ensure that they continue to behave in the manner which has appealed to the Committee in the past; and, secondly, to review the qualifications for registration. These societies are, not entirely, but in the main, co-operative societies.
The Committee may be interested in the scale of their activities. The latest Report of the Chief Registrar of Friendly Societies relates only to 1963, but, according to that Report, there were in that year 7,257 societies. But what will interest my hon. Friend, I think, is the fact that 828 of these societies were in the supply of general stores, and they


did well over £1,000 million worth of turnover in 1963. Therefore, it is right that we should, in considering this Clause, have a general look at their activities.
The point which must concern us is how this privilege is defined in the Clause. The beginning of the Clause states that
share interest or loan interest paid by a registered industrial and provident society shall not be treated as a distribution",
and so on. What do the Government mean by "registered industrial and provident society"? For this purpose, one goes naturally to the consolidation Act, the Industrial and Provident Societies Act, 1965, from which one sees that there are, broadly speaking, three conditions which have to be fulfilled for a body to be a registered society. Therefore, if the Bill is passed, such a society will have the privileges offered by the Clause.
I am not entirely happy about the draft of the definition of a registered society. Since there is a common aim between the Chief Secretary and myself, may I refer him to Section 1(2) of the Industrial and Provident Societies Act, which says that the conditions which have to be fulfilled are
(a) that the society is a bona fide co-operative society;
(b) that, in view of the fact that the business of the society is being, or is intended to be, conducted for the benefit of the community, there are special reasons why the society should be registered under this Act rather than as a company under the Companies Act 1948".
Those hon. Members familiar with the Prevention of Fraud Act will see a certain familiar ring in those words. I find the words "special reasons" vague, but I pass over that phrase and come to subsection (3), which raises doubts in my mind, for it states:
In this section, the expression 'co-operative society' does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited with, or lent to, the society or any other person".
I had doubts when I read that subsection and compared it with the wording of the Clause we are discussing. I have been confirmed in those doubts as a result of one of my hon. Friends, who is a distinguished member of the Scottish Rugby Football Union, having received

a letter from the Union's accountant in which the situation had been interpreted to mean that in future they would have to pay the Corporation Tax, whereas in the past they came under the general provisions. It may be that the let out lies in the word "mainly", and I should be grateful if the Chief Secretary would give his views on the subject.
I assure the right hon. Gentleman that I am not trying to make a point against him. I wish to ensure that the privileges which the Government are seeking to give in the Clause are applied. I have discussed the matter with some of my colleagues who are in the legal profession and they confirm that I am raising a valid point. I am sure that the right hon. Gentleman is anxious to see that all the societies which in the past benefited from these privileges should continue to do so.

Mr. Diamond: I readily respond to the informed speech of the hon. Member for Eastleigh (Mr. David Price). As he correctly said, the purpose of the Government—which is enshrined in the Bill—is to adapt the Corporation Tax to the special circumstances of registered industrial and provident societies—that is, co-operative societies—and certain co-operative housing associations.
The hon. Gentleman's main concern is about the definition. The definition in the Bill is the same as the definition in Section 26 of the Finance Act, 1958. The Bill had to adopt the existing Finance Act definition because the Industrial and Provident Societies Act, 1965, had not been passed when this Finance Bill was being drafted. Thus, exactly the same definition applies as previously and the same advantages will arise as previously.
If the hon. Member for Eastleigh is anxious about a certain rugby club, if he will write to me and let me have the details, I will be only too glad to look into the matter. We are, I believe, achieving what both he and I want to achieve; a carry over into the Corporation Tax arrangements of the same advantages as exist at present.
The hon. Member for Aberdeenshire, West (Mr. Hendry) is still showing the shadows that were here five or six hours ago but which have gone as a result of the dawn and the sunlight. He is anxious about co-operative societies and the damage he fears that they are going to


inflict on other forms of trading. I invite him to relax. There is no evil design in the Bill. We are merely applying for Corporation Tax purposes the existing situation.
He asked me to comment on the cost, by which I understand him to mean the operative cost—in terms of the Bill as opposed to the existing situation—of the two subsections. If that is his question, then in each case the answer is "Nil", because all that we are doing is carrying forward an existing situation.
The hon. Gentleman also asked me to explain shortly what subsection (7) means. It means that there will be no Corporation Tax charge on capital gains in consequence of amalgamations. I am sure that the hon. Gentleman read the Clause with his usual care, but I wonder whether he noted the first line,
If in the course of, or as part of, a union or amalgamation of two or more industrial and provident societies. …
All that the subsection provides is that, where there is an amalgamation of two co-operative societies, either by union or by transfer of engagements, it is to be treated for Corporation Tax purposes as taking place at such a price as gives rise to no gain or loss to the transferor. The values are taken over by the transferee, and, as there is no difference in value, there is no question of any realised gain subject to Capital Gains Tax.
I hope that I have satisfied the hon. Gentleman that this is a Clause which, as the hon. Member for Eastleigh said, incorporates all the provisions in our existing law, merely bringing into the Corporation Tax what already applies for income Tax and Profits Tax.

8.0 a.m.

Mr. James Scott-Hopkins: I wish to pursue a point raised by my hon. friend the Member for Eastleigh (Mr. David Price) when he asked whether co-operative societies came within the ambit of the Clause. This is a most important point for co-operatives. The right hon. Gentleman will know that my interest is in agricultural co-operatives, and, although there is a later, Amendment about them, it will hasten our consideration of the matter in due course if we can have the question answered now.
I am still perplexed by the definition in Section 1 (3) of the Industrial and Provident Societies Act, 1965:
In this section, the expression 'co-operative society' does not include a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends or bonuses on money invested or deposited …
and so on. This is the key provision. Unless I am mistaken, the majority of co-operatives—certainly those in agriculture—come under that exclusion and, therefore, Clause 65 would not apply to them, so that they would be excluded from these benefits and the operation of the revelant provision in Clause 43. In Clause 43 there is a specific reference to industrial and provident societies and bodies engaged in mutual trading with reference to bonuses deductible in computing income as mentioned in Section 444(2) of the Income Tax, 1952.
I noted what the Chief Secretary said about this, and I may have misunderstood; but I have come to the conclusion that co-operative societies in the main will be excluded from the benefits of Clause 65 as well as from Clause 43. Will the right hon. Gentleman make quite clear what the position is to be? I do not think that he can rest his case on the word "mainly". This is an important matter for co-operative societies, and I hope that we can have clarification of it now.

Mr. Diamond: I gladly respond to the hon. Member for Cornwall, North (Mr. Scott-Hopkins). As I understand it, the 1965 Act is purely a consolidation Act. It does not alter the law at all. Therefore, the situation is that the Corporation Tax adopts precisely the existing definition in the Finance Act, 1958, when, I suspect, the law was the same as has been consolidated by the new Industrial and Provident Societies Act. So there is no inconsistency. But, in any event, it is not that definition which affects these provisions. This definition is brought in from Section 26 of the Finance Act, 1958. I can tell the hon. Member for Cornwall, North that co-operative societies are included and do get the benefits about which he is anxious.
If he fears that there is any inconsistency between the statutory definitions, which is what I think is worrying him, I will look into that between now and


Report. What the Government intended to do and are doing is to treat the same societies in the same way and to the same extent.

Mr. Hendry: I should like briefly to clarify two questions which I asked the Chief Secretary because I think he misunderstood them. Firstly, what would be the resulting amount to the Treasury if co-operative societies were treated in the same way as ordinary companies registered under the 1948 Act? If the right hon. Gentleman does not know the answer perhaps he will tell me between now and Report. Secondly, the Chief Secretary, in his interpretation of subsection (7) omitted to notice that union or amalgamation is the alternative to transfer. As a result of the misunderstanding by the right hon. Gentleman there is ambiguity in this Clause.

Mr. Edward M. Taylor: I will ask one brief question on subsection (7). It is intended that, in the event of a transfer between two societies and the assets being disposed of, no Corporation Tax will be payable in respect of any capital gain. The obvious way of expressing that in the Bill is to say that they are exempt. But the subsection does not say "exempt". It goes into more detail and says that the position would be regarded as though no gain or loss had been made.
This raises the relevant question of what happens when an asset is transferred from one society to another at an increased price and then sold to a third party? Is this the reason for drafting the subsection in this way?
I will give an example of shop premises bought for £5,000 and transferred to another society for £10,000. There would be no gain or loss for the purposes of this tax although there would be an actual gain. If the premises were sold to a third party which was not a cooperative society for £15,000, would the gain be £5,000 or £10,000? Is this the reason why the subsection has been written in this way and, if it is not, could not the subsection have been drafted in a much more simple way?

Mr. Diamond: I will do my best to satisfy the hon. Member. I do not want to get involved in a long discussion with the hon. Member for Aberdeenshire, West (Mr. Hendry) about the comparative treatment of co-operative societies and

what he described as ordinary companies. I take it that he was referring to their treatment for tax purposes. Broadly they are the same and therefore the approximate answer to whether there is any saving or not is that the capital is treated as loan capital because that is the nature of it; the "divi" is returned to the purchaser and therefore deducted from the profits in the same way as an ordinary company might give a credit note. Profits are assessed in the ordinary way and the capital is deleted in the ordinary way and tax is paid on the balance.
I will look into the matter more closely if the hon. Gentleman wants me to do so but there is no difference at all. I will not say the hon. Gentleman has a bee, because he is not wearing his Scottish bonnet.

Mr. Hendry: There is a small matter of £15.

Mr. Scott-Hopkins: I am grateful to the right hon. Gentleman for his explanation. On reflection, although I have taken a little time because of my mental processes at this hour, I am still not entirely happy about some of the definitions but perhaps we can correspond about it and I can raise it at a later stage.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 66.—(BUILDING SOCIETIES.)

Mr. Lubbock: I beg to move, Amendment No. 650, in page 85, line 46, to leave out from "1952" to end of Clause and to add:
the building society shall not be liable to pay corporation tax on its profits".

The Temporary Chairman (Mr. Harry Hynd): It is suggested that the Committee should discuss at the same time new Clause No. 31—Building societies—standing in the name of the right hon. Member for Orkney and Shetland (Mr. Grimond) and the names of his hon. Friends:
A gain shall not be a chargeable gain if it accrues to a building society within the meaning of section 445 of the Income Tax Act 1952.

Mr. Lubbock: I am sorry to see the Chief Secretary leaving the Chamber because I thought that he had become


more cheerful in the last few hours, in some contrast with his attitude earlier when he became rather annoyed with me the last time I spoke. The Chancellor has also been smiling again and I actually noticed even the Patronage Secretary in a jovial mood. I therefore move this Amendment with a certain justifiable optimism, having seen those cheerful faces on the Government Front Bench.
It is a pity that the debate takes place at this hour, after a very long night, when not many hon. Members may feel disposed to speak. It would be a great shame if millions of people outside who are directly interested in a reduction of mortgage rates—which would be the result of accepting the Amendment—were to get the impression that, because not many speeches were made on the Amendment, we in this Committee are not vitally concerned with the problems they are facing. Those problems would be to some extent relieved by the Amendment.
The Amendment is concerned with the Corporation Tax and the new Clause with the Capital Gains Tax. I do not propose to refer in detail to the new Clause because, as I hope the Chancellor will recall, I referred to it in a debate on the switching of gilt-edged investments on 31st May. Although he did not give me a reply on the points I raised then, I am sure that he will have had time to read them in HANSARD since. I propose to deal exclusively with the effect of Corporation Tax on the building societies.
I begin by reminding the Committee of what was said by the Minister without Portfolio when we were discussing the taxation of local authority associations. He made two remarks that I noted because I think that they are of some relevance to this Amendment. He said that the work the local authority associations had to do was of a very worthy kind and that to consent to the Amendment then under discussion would not involve any serious breach of principle. I suggest that those two arguments apply equally to relief of Corporation Tax on building societies.
This is something that the Chancellor could do right now in implementation of the promise made by the Labour Party before the election to give some help to people who are trying to buy their own

homes. When the Secretary of State for Economic Affairs first talked about mortgages at less than 3 per cent., I never thought that a practical possibility. I do not think that, in the foreseeable future we shall get anything like that reduction in mortgage rates of interest.
8.15 a.m.
It is quite wrong to lead people, who in many cases are paying something like 7 per cent. for their mortgages, to think that reductions of over a half in rates of interest that they pay are possible in the present state of the country's economic affairs. All I am suggesting is a very modest reduction which the building societies could pass on to the borrowers if the Chancellor was prepared to accept these two Amendments.
The objects of building societies are prescribed by Statute and they are to encourage thift by the collections of the savings of people and to encourage home ownership by lending these accumulated savings to persons wishing to buy their own houses. These two objectives have commanded the support of all political parties for many years. At present total advances of building societies are nearly £1,100 million.
In 1932 the building societies were not liable to any taxation on their residual surpluses and it was in that year that Income Tax was imposed on them for the first time. In 1937 the societies were called upon to pay the National Defence Contribution and they made no protest against that because they thought it right they should make some contribution towards the cost of rearmament. Then in 1947 the National Defence Contribution was replaced by the Profits Tax and the whole nature of the taxation of building societies had changed. None of the grounds adduced at the time for the introduction of that tax applied to building societies, and for several years running, in practically every Finance Bill since the war, the building societies have sought to obtain exemption from both Income Tax and Profits Tax on the surpluses which they ploughed back.
In my opinion, what was right in 1932 is still right today. The building societies do not trade for profit like an ordinary commercial company. The important factor to bear in mind is that they have no equity shareholders to whom ordinary


dividends could be paid. There is, therefore, no body of people who could benefit from this reduction in taxation other than the people who are borrowing money from the building societies for the purpose of home ownership. What the building societies try to do all along is to maintain a fair balance between their investing members and their borrowing members. In those circumstances, it is quite wrong that taxation should be applied to their surpluses as if they were ordinary commercial or industrial concerns. It has been estimated that if the Corporation Tax were completely remitted the savings to the societies in the first year would be about £10 million in tax on their operating surpluses. This would not become effective until the current taxes on their surpluses had expired and one cannot predict what the situation would then be with regard to the interest rates.
Speaking roughly, it is calculated that this remission would amount to something like one quarter of 1 per cent. on the borrower's interest rate. If the Chancellor is interested I can let him have more detailed calculations, showing that not only would one be able to give this reduction of a quarter per cent. but also that it would enable the building societies to plough back slightly more into their surpluses and thereby to increase the amount which they had available for borrowing.
This is quite a small relief, but I think it is one which would be very widely welcomed, and from which the Chancellor would gain great credit, if he were to put it into operation in this Finance Bill. I would remind him of the very great disappointment which was felt by building societies that nothing was done for them in this Budget. They say, in Building Society Affairs, published by the Building Societies Association, in the May issue:
It is to be regretted that the Government did not take this opportunity to relieve Societies from tax on their net operating surplus and so restore the concessionary treatment they once enjoyed.
So I appeal to the Chancellor to give this small concession to home owners, in implementation of the promises we heard so much about last October before the General Election.

Sir Eric Fletcher: I should like to respond immediately to the speech of the hon. Member for Orpington (Mr. Lubbock). I do not think that I need elaborate the point that we in the Government and everybody on these benches are very sympathetic to the cause of the building societies, and, as has been stated, we are considering ways in which we can help on the whole question of reduction of mortgage rates; but we have come to the conclusion, as the Committee will know, that we do not think it is the appropriate way of giving assistance to the building societies by relieving them from Corporation Tax and Capital Gains Tax as suggested in these two Amendments.
In the first place, I should like to emphasise the fact that building societies are already deriving very considerable benefits from the fiscal changes introduced by this Finance Bill. As the hon. Member will be aware, the building societies are at present liable to both Income Tax and Profits Tax, and as a result of the substitution for those two taxes of Corporation Tax there will be a very considerable relief in the total tax burden on all building societies. I cannot give a precise estimate, but according to some of the calculations I have seen the relief which the building societies in the aggregate will derive through the change over to Corporation Tax may well be some £4 million. Therefore, we are in this Bill doing something very considerable for the benefit of building societies.
The hon. Member went on to suggest that no breach of principle would be involved if we made this concession. I am afraid I must disagree with him there. I gather that some of the passages of his speech were taken from the Final Report of the Royal Commission on The Taxation of Profits and Income. If he had read paragraph 562 of that Report I think he would have realised that the concession which he suggests should be made to building societies, by relieving their surpluses of all liability to Corporation Tax, really would be an inroad on the principles enunciated in that Report, where it says:
It seems to us that only by an impartial distribution of the tax whenever and wherever profits"—


it was talking of Profits Tax, but the same argument applies—
are found can there be a fair balancing of costs and prices between the public and private sectors of industry and commerce. And if these factors are not balanced fairly the true relationship between these different activities in respect of their development is itself disturbed.
The reasons which led us to reject the suggestion made from the Liberal benches that the nationalised industries should be exempted from Corporation Tax operate equally to lead us to reject the suggestion that it would be feasible, or logical, or practicable to exempt building societies from Corporation Tax. Contrary to the assumption made by the hon. Member, in our view there would be repercussions of such a nature as to make it impossible to make this change.
The hon. Gentleman then asked what would be the cost involved if his Amendment were adopted. It is impossible for me to give any reliable estimate. It would be a very considerable figure; and of course, over and above the direct cost involved by conceding the Amendment, it is impossible to speculate as to what would be the indirect cost involved because of the inevitable consequences and repercussions that would flow from it.

Mr. Lubbock: There would be indirect savings—and I am sure that the hon. Gentleman realises this—because if the rate of interest to borrowers were reduced, they would get less remission on their own tax paid.

Sir Eric Fletcher: That is one of the difficulties. That does not follow. The hon. Gentleman suggested that if this remission of tax were made there would be an inevitable reduction in the mortgage rates to borrowers.

Mr. Lubbock: No.

Sir Eric Fletcher: I think that the hon. Gentleman suggested that, but that consequence does not follow. There is no certainty that if the building societies were excused from any liability to Corporation Tax the benefit, or at any rate the whole benefit, would be passed on to borrowers. It might, or it might not. Part might be passed on, and part might be used to add to surpluses.
As the hon. Gentleman probably knows, there were certain discussions with the Building Societies Association

before the Bill was introduced, because the provisions of this Clause with regard to the taxation of building societies are somewhat complex. The Government were satisfied, as was the Association, that there was no certainty that relief of this kind would be reflected in anything like full concessions to borrowers.
Therefore, sympathetic though we are to the problems of all those interested in obtaining money on mortgage from building societies, and anxious as we are to help to devise workable schemes in that direction, we are satisfied that this is not a matter which can be dealt with by an undesirable modification of the fiscal laws, and I must, in consequence, invite the Committee to reject the Amendment.

Mr. Peter Bessell: I am sure that the Minister's reply will be received with some dismay, not only by this side of the Committee, but also by some right hon. and hon. Gentlemen opposite. We are all gravely concerned about the position of the building societies, and the immense contribution which they have made to our national life in so many spheres.
Throughout this long session we have heard special pleadings on behalf of special causes, and I do not apologise for adding my voice to that of my hon. Friend the Member for Orpington (Mr. Lubbock) in making a special plea on behalf of the building societies.
I hope that the Chancellor's mind is not entirely closed on this matter. Not only have the building societies rendered great service to the community by providing funds which have enabled young people and others to acquire their own homes over many years, but they have been a source of investment for the small investor who has sought somewhere to put his money, somewhere that would be safe, and somewhere where he could expect a reasonable and fair return on his capital investment.
During the current year the building societies have experienced real difficulties.
8.30 a.m.
I do not want to over-emphasise or exaggerate those difficulties in in any way, and I do not want to suggest that there is any lack of confidence on anyone's part about the ability of building societies


to overcome their temporary problems. Nevertheless, the building societies represent a very important part of the economic life of the nation. About £4,700 million is invested in building societies in this country. In addition, it is notable that in the first four months of this year they managed to advance about £330 million for house purchase and other purposes. In view of the difficulties which the building societies face as a result of the financial crisis which the country has been experiencing—and I do not make any sort of political point out of this—it would be a very helpful gesture to them, and to the small investors and those people who are seeking to purchase homes, if the Chancellor would consider making a worthwhile concession in this case, not only in respect of Corporation Tax but more particularly in respect of the proposed new Clause which deals with relief from Capital Gains Tax.
Building societies work under properly restricted conditions, and I do not quarrel with those restrictions. It is right that they should be required to maintain reserves. This is in the interests of the building societies themselves and their reputation as well as for the protection of the small investor. Secondly, they are limited by Statute in relation to the form of investment. I shall not labour the point by going into all the ways in which building societies may invest their money. They are well known to all hon. Members. Nevertheless, they are prohibited from making speculative investments, unlike any business concern—and in that can be included a very wide sphere of business activity. They may not use their money for speculative purposes.
For that reason alone there is justification in arguing that because they are restricted they are entitled to receive special treatment in relation to tax. Also, because of the wise distribution of investment within the limitation imposed upon building societies, some have been able to gain considerable advantages from capital gains. This has been due largely to the fact that they have spread their portfolio carefully and wisely within their limitations.
With this in mind I repeat the hope that these Clauses will receive earnest consideration. Building societies need growth, security and expansion, and not

only because of the services they have given to the small investor, and not only because of the service they render to the nation in providing house mortgages, but because they are an integral part of the national financial structure. I hope that the Chancellor, who has had some wise second thoughts on some other matters, may have some second thoughts in this respect also. It would gain him the support of a very wide section of the public, as well as of the building societies themselves.

Mr. Rafton Pounder: There is one point in respect of which I should like some clarification. It concerns the apparently inequitable feature contained in subsection (2,b). It would appear that building society interest will be treated as if it is received net and used up at the standard rate for inclusion in the Income Tax computation. No relief whatsoever would appear to be given under Schedule 11 for the Income Tax which is deemed to have been charged. May we have a straightforward answer to this very important point?

Sir Eric Fletcher: They will get relief. I think that the hon. Gentleman will find that there is an Amendment dealing with subsection (2), to which he referred.

Mr. Lubbock: I should have thought that the Minister would have had something to say in reply to the arguments which have just been produced by my hon. Friend the Member for Bodmin (Mr. Bessell) —

Mr. Maxwell: Why?

Mr. Lubbock: I hope that we shall not end this debate until we have heard something more from the Minister without Portfolio. Without being offensive, I would say that his reply was the poorest we have heard during the night, and I have listened to many. I can understand it. The hon. Gentleman is perhaps tired and would like some time to think again about this. If he would like to take it away and promise me that he will come back with something on Report, I should possibly be prepared to withdraw the Amendment. His arguments were extremely feeble. I will deal with two of them.
He said, contrary to what I was trying to argue in moving the Amendment, that there would be a breach of principle. In


that case, why was there no taxation of building societies before 1932? This is a new principle erected since then, and the hon. Gentleman's argument was so obscure that I could not follow what it was. We are not talking about a matter of logic. We are talking about a political decision which can be taken here and now, and this would be an earnest of the Government's endeavours to stimulate home ownership. It is all very well for Ministers to say that they sympathise with home owners and that they would like to see the building societies playing an even greater part and giving them a pat on the back for what they have done so far—[An HON. MEMBER: "The M.B.E. as well."]—and the M.B.E. as well, perhaps.
We should have a bit less lip-service paid to home ownership by this Government and little more help for it. The hon. and learned Gentleman completely ignored what I said about promises last October. I do not think that many people thought at that time that this summer we should be faced with 7 per cent. interest rates and that we should he arguing about this minute reduction—only ¼ per cent. and having a hardhearted answer like the one which we have had from the Minister without Portfolio.
On the question of the reduction, this ¼ per cent. I entirely agree with the hon. Gentleman that it does not all have to be passed on to the borrower and that it might be wise of the building societies to use some portion of it for increasing their reserves. That will enable them to lend more money to increase the number of people who could become home owners. It would be a matter of policy, possibly, as to how they would split the benefit they would obtain from this increase in taxation. I think that I was being a little cautious in talking about ¼ per cent. If the hon. Gentleman would like, I could show him some calculations which I have made, which show that the benefit would be something like 8s. per cent. That is more than ¼ per cent. and I was allowing for that when I said that they would not only reduce the rates to borrowers by that amount, but would also be able to put a little more into reserve.
These calculations, of course, are on the basis that everything else is equal. I am not committing the building societies

to doing what I have suggested about the reduction in the mortgage interest rate. I think that these are reasonable calculations on the basis of what we know about the Corporation Tax, Income Tax and Profits Tax which the building societies have to pay at present. Throughout these calculations, I am assuming that the interest which they pay on shares is the same in every case and that their management expenses and so on are identical. I hope that the hon. and learned Gentleman will not try to dispute these calculations, which I can show him if he would like to see them after the debate.
If he is not prepared to accept this Amendment, what are the Government going to do about the home owner? Will they drag on through the summer forgetting about all those promises which sounded so marvellous at the election, or will the Minister now think again and take the opportunity to redeem at least one of the promises which the Labour Party has still to fulfil?

Mr. Anthony Barber: I cannot be so hard on the Minister without Portfolio as the hon. Member for Orpington (Mr. Lubbock). My comments on this Amendment will be brief, because the arguments for and against it have been put cogently and succinctly. Nevertheless, I would remind the Committee that successive Chancellors of the Exchequer have felt bound to resist the view expressed in the Amendment that the profits of building societies should not be liable to tax. It follows consistently with that that I cannot advise my right hon. and hon. Friends to support the Amendment. All the same, I congratulate the Liberal Party on exposing the cynical attempt of the Labour Party year after year in this Committee to lead the country to believe that building societies would be exempt from taxation on their profits.
I would ask, in passing: where is the Minister of Housing? Where is the First Secretary of State? I can only assume that they are still both happily and comfortably and peacefully sleeping in their owner-occupied houses. At any rate, I should have expected the right hon. Gentleman the First Secretary to have been here, poised for instant support of this Amendment—but that was not to be.
We are here concerned with the charge of Corporation Tax on building societies,


but Corporation Tax is charged only on profits—profits as defined by Clause 42. If there were no profits there would be no charge. The Minister without Portfolio says, and I believe that he is right, that if the Amendment were accepted there would be a serious breach of principle, but I would quote now the classic case for the proposition expressed in the Amendment that building societies do not make profits in the normal sense, and that there should therefore be no charge on them—be it Profits Tax or Corporation Tax. The quotation is very brief:
… what we are talking about is not a profit but a reserve. It is different, for a reason I want to stress again in a moment, from the reserves of ordinary public companies with whose affairs we tend to deal for so great a proportion of the time we spend on the Finance Bill each year.
A building society is not, as the hon. Member said, a trading company. There are no profits.
Those were the words of the present Prime Minister. And I must say that I would have expected him to be here, knowing the right hon. Gentleman's strong feelings—and these views were expressed by him after the Report of the Royal Commission on the Taxation of Profits and Income and I have no doubt that he took account of what it said—and we know all that has been said by the Minister without Portfolio this morning from that Report. But no—the Prime Minister is not here to support the Liberal Party.
I might mention that in that same debate—and it was a very long debate, lasting several hours—speaking on a new Clause to exempt building societies from the Profits Tax, the Prime Minister also said:
As a result of the Government's monetary policies, which I do not propose, perhaps to the relief of the Committee, to expatiate on at any length tonight since I had one or two words to say about them in a letter to a newspaper this morning, the householder is already paying what many people will consider to be an excessive rate of interest to the building societies, though, as the hon. Member for Wimbledon made clear, that cannot be laid at the doors of the building societies. It must be laid at the door of the Government's monetary policies."—[OFFICIAL REPORT, 2nd July, 1957; Vol. 472, c. 948–9.]
What we are all wondering is what hon. Members opposite will do. For years they have spoken in support of the very

sort of proposition which has today come from the Liberal Party. The Liberal Party is consistent in what it says. I and my right hon. and hon. Friends have been consistent in what we have said over the years. Are the Labour hon. Members to be so inconsistent as to vote against this Amendment, if the Liberals should decide to go to a Division? We shall see.

Amendment negatived.

8.45 a.m.

Sir Eric Fletcher: I beg to move, Amendment 697, in page 86, line 28, to leave out from "if" to "and" in line 33 and to insert
a society which but for the arrangements would be assessed to income tax for the year 1965–66 by reference to a period ending before that year is under the arrangements (and without any election thereunder by the society) so assessed by reference to a period ending in that year, then subsection (3A) below shall apply to the society in place of the general provisions of this Part of this Act as to the time for payment of corporation tax".

The Temporary Chairman: It would be convenient to discuss, at the same time, Amendment No. 698.

Sir Eric Fletcher: I hope that the Committee will allow me to move these Amendments briefly. They look somewhat lengthy and are designed to make an alteration in the method proposed for dealing with the taxation not of surplus profits of building societies, but of their funds. The Committee will be aware that, for many years past, the provisions of the Income Tax Act relating both to the borrowings and the lendings of the building societies have been dealt with by the Revenue by rather special arrangements, hitherto enshrined in Section 445 of the Income Tax Act 1952.
By reason of the transition to Corporation Tax, there were considerable discussions with the association of the building societies as to the proper provision to be made. The Clause in the Bill as drafted was prepared by agreement with the building societies. They thought at the time it would be convenient for them to change from the current year assessment and to revert to the preceding year form of taxation. Since then they have had further thoughts about it and have come to the conclusions that the transitional provisions for current year assets would have unfortunate currency


results and, as a consequence, at their request, these Amendments have been put down.
I hope that they will be acceptable to the Committee.

Amendment agreed to.

Further Amendment made: In page 86, line 43, at end insert:
(3A) Where this subsection applies to a building society, then—

(a) corporation tax assessed on the society for any accounting period shall be paid within one month from the making of the assessment, except that if the society's basis period for the year 1965–66 does not extend into the year 1966, the tax shall not be payable before the like time after the last day of the accounting period as 1st January 1966 is after the last day of that basis period; but
(b) if corporation tax has not become payable by the society for an accounting period by the like time from the beginning of that period as there is between the beginning of the said basis period and 1st January 1966, the society shall at that time from the beginning of the accounting period make a provisional payment of tax computed on the amount on which the society is chargeable to corporation tax for the accounting period last ended (or, as the case may be, is chargeable to income tax by reference to the last basis period), with such adjustments, if any, as may be required for periods of different length or as may be agreed between the society and the inspector.

References in this subsection to a society's basis period for the year 1965–66 are references to the period by reference to which the society is assessed to income tax for that year under the arrangements referred to in subsection (3) above.

Clause, as amended, ordered to stand part of the Bill.

Clause 67.—(COMPANIES CARRYING ON MUTUAL BUSINESS, OR NOT CARRYING ON A BUSINESS.)

Question proposed, That the Clause stand part of the Bill.

Mr. David Price: I do not want to interrupt the increasing pace of our financial "teach-in", but I would like some clarification of this Clause. As I understand, the object is to extend the tax privilege at present enjoyed by companies carrying on mutual business or not carrying on a business. These privileges are embodied in Section 444 of the Income Tax Act, 1952, but, as the Committee knows, their origin can be traced much further back to 1893. There is no mention in this Clause on that question of

liability to, or exemption from taxation, of trading surpluses arising out of mutual business.
This is a matter which the Committee will recall was discussed fully last year in this Committee. The original Clause 19 of last year's Finance Bill had two main objectives—one was to deal with a form of tax avoidance, the possibility of which was shown by a Lords' judgment in 1963; and, secondly, to implement the recommendations of the Royal Commission on Taxation that surpluses operating from mutual trading should be taxed.
The second objective of my right hon. Friend the Member for Barnet (Mr. Maudling) came under considerable attack from all sides. As a result, on Report my right hon. Friend withdrew his original Clause and introduced a new Clause with the limited object of stopping up the possible loopholes for tax evasion. That is now Section 21 of last year's Finance Committee. It was made clear that all sides of the Committee wanted the trading surpluses out of mutual trading to remain untaxed.
I seek an assurance that Clause 67 will not lead to the surpluses arising from mutual trading being subjected to Corporation Tax. It relates to distributions. There is no mention of trading surpluses. Because of the provisions of Clause 49, which applies the general Income Tax rules to Corporation Tax, I assume that the status quo will be maintained and that trading surpluses on mutual trading will not be subject to tax.
However, in view of the considerable concern shown by the Committee last year and the general agreement that it was right that trading surpluses arising out of mutual trading should not be subject to tax, we ask for an assurance that that position is being maintained. If it were not, and if it were to be the intention of the Government under the Clause to subject the surpluses arising out of mutual trading to Corporation Tax, I am certain that my right hon. Friends and I would want to move on appropriate Amendment at a later stage, and I am certain that it would meet with very considerable support on the Government side.
I do not think that the Treasury Bench want to do this, but I am a little suspicious because over a long history the Inland Revenue has made various attempts to persuade the Government of


the day and Parliament to change their view. The most recent instance was the Royal Commission.

Sir Eric Fletcher: I can assure the hon. Member that his fears are quite unfounded. There is no change whatever from the present position. The status quo is being maintained. As he says, the present position is that the surpluses arising from mutual trading are not charged to Income Tax or Profits Tax. The position will be precisely the same; they will not be charged to Corporation Tax. Therefore, distributions out of surpluses on mutual trading will not suffer any tax.
The whole object of the Clause is to carry over into the Corporation Tax scheme the existing provisions of the Income Tax arrangements. There has been no attempt, as the hon. Gentleman rather ungenerously suggested, on the part of the Inland Revenue or anybody else to deprive those who participate in the activities of these mutual trading concerns of the benefits which they already enjoy.

Mr. Hector Monro: I seek clarification of a small point touched on by my hon. Friend the Member for Eastleigh (Mr. David Price) and the Chief Secretary on Clause 65. This concerns amateur sports clubs and mutual trading, which really comes under Clause 67. Many sporting associations, such as hockey and rugby clubs, run their accounts on the principle of mutual trading, and this is accepted by the tax inspectors, so that it is not necessary to pay tax on gate money within an association. If Corporation Tax has to be paid on the surplus, the large amount of money that the clubs have been able to plough back into the game, for the improvement of facilities and so on, will be lost.
I think that it is generally agreed by accountants that this is so. In fact, I have the accounts of a very well-known sporting body, and the auditor, who is a well-known accountant in Scotland, has signed the accounts saying that provision has been made for Corporation Tax which, if it is deducted, will become payable on this body's surpluses for the year.
I would be grateful if the Minister would confirm that amateur sports clubs

—and I stress the word "amateur", because there is no profit attached—will in no way be liable to Corporation Tax.

Mr. Scott-Hopkins: I have no intention of keeping the Committee long. I am grateful to the Minister for what he said confirming that the position is not changed as far as surpluses from mutual trading are concerned. I have had representations about this matter. But I should like the Minister to explain, as briefly as he wishes, where this is contained in the Clause. I have looked through it as carefully as I can, and, although I accept what the Minister has said, I cannot see where the assurance which he has given to the Committee is contained in the Clause. I shall be grateful if he will tell us where it is to be found.

Sir Eric Fletcher: The reason that I did not elaborate or attempt to spell out the provisions in the Clause was that I thought hon. Members would be satisfied with the assurance which I gave, and which I repeat, that so far as these clubs, associations and all involved in mutual trading are concerned, there will be no change whatever in the present system.
If the hon. Member is really concerned, I invite him to look at Clause 67 (1) where it is reasonably clear. It says:
Subject to subsection (2) below, where a company carries on any business of mutual trading or mutual insurance or other mutual business, the provisions of this Part of this Act relating to distributions shall apply to distributions made by the company notwithstanding that they are made to persons participating in the mutual activities of that business and derive from those activities …"—
these are the operative words—
but shall so apply only to the extent to which the distributions are made out of profits of the company which are brought into charge to corporation tax or out of franked investment income (including group income).
I shall not read subsection (2), because it would weary the Committee, but it provides that in the case of a company carrying on mutual life business the provisions of the Bill relating to distributions
shall not apply to distributions made to persons participating in the mutual activities of that business and derived from those activities.
The position is perfectly clear. The distributions which are made to members out of surpluses of mutual trading will not be charged to tax. The only benefits


that will arise to tax as at present are any proceeds from investment income, or, of course, any activities, if there be such, of a non-mutual trading kind. In the case of athletic clubs and sports clubs, to which the hon. Member referred and with which we are mostly concerned, there is nothing but mutual trading and in the ordinary case there is no investment income; therefore, no question of Corporation Tax arises.

Mr. David Price: I do not think that the Minister without Portfolio has got our point. The Clause is clear when it relates to a distribution that is made to members. We are concerned with the case where the surplus of trading is held and is not distributed to members. This goes back to the point to which the Royal Commission objected. It said that the mutual trading company had built up reserves. The members may have changed. One of the reasons that it was required to tax the surplus was a feeling that the company had lost the basic simplicity of the mutual trading identity. This was a view which was rejected last year by this Committee.
9.0 a.m.
We accept assurances from the Minister without Portfolio, but learned judges who have to interpret Acts take them in the way that they are drafted. They do not go by assurances given by occupants of the Government Front Bench.

Sir Eric Fletcher: I have gone into this matter. The operative provisions are contained in Clause 67, with which should be read the provisions in Clause 49, which are the general rules for the computation of income. Hon. Members need have no misgivings about this matter.

Mr. Monro: I thank the Minister for trying to help. Is the income from investments within sporting bodies and ploughed back into the bodies for group facilities excluded as well?

Sir Eric Fletcher: No. Income from investment is subject to tax.

Mr. Monro: Not Corporation Tax?

Question put and agreed to.

Clause ordered to stand part of the Bill.

Clause 68.—(COMPANY PARTNERSHIPS.)

Question proposed, That the Clause stand part of the Bill.

Mr. Patrick Jenkin: I do not want to detain the Committee long, but I should like to ask a question on this Clause and I should be grateful if the Minister without Portfolio could answer it.
The Clause concerns what are called, in the side note, company partnerships. The pattern which the Clause adopts is that the profits of the partnership are to be computed on Corporation Tax principles with one or two adjustments. The adjustments are in the provisos to subsection (1), and I would refer particularly to proviso (b), which says:
no deduction or addition shall be made for charges on income or for capital allowance and charges, nor in any accounting period for losses incurred in any other period".
There are three separate heads there: first, charges; secondly, capital allowances and charges; and, thirdly, losses. Perhaps we can ignore losses; my question does not concern losses. "Capital allowances and charges" is defined in subsection (7) and means capital allowances and charges which come within Clause 52.
We are, therefore, left with the first head—charges. I understand "charges" to mean such things as loan interest, annual payments of various sorts, mortgage interest, perhaps royalty payments, and other things of that sort. Once the profits of the partnership have been computed on these principles, we then have to make sure that the partners pay their share of the tax on those profits. Subsections (2) and (3) deal respectively with the company's share of the profits and with the individual share of the profits. In subsection (2) we bring back the appropriate share of these charges and capital allowances and charges, and therefore no difficulty arises.
However, subsection (3) deals with the individual share of the partnership profits for an obscure reason which I am unable to understand—no doubt this is due to my mental obtuseness at this hour—

Mr. Harold Lever: On a point of order. I am unable, by reason of the powerful sunlight, to see the faces of hon.


Members opposite. Could I have some assistance in the matter, Dr. King?

The Chairman: The hon. Gentleman's complaint will be looked into.

Mr. Jenkin: I can assure the hon. Member that he is not missing anything through not being able to see my face.
When we come to subsection (3), which deals with the individual's share of the partnership profits, we find that the adjustments made under the proviso to subsection (1) are referred to again, but, for some reason, the charges—such as mortgage interest, loan interest, and things of that sort—do not appear to be brought back again. Whereas the company, under subsection (2), is allowed its appropriate share of capital allowances and the other charges, that does not appear to apply to the individual. Has this arisen because of the haste with which the Measure was produced? In short, why is the individual not allowed to deduct his share of the charges which are charges on the partnership's income?

Sir Eric Fletcher: I should have thought that the reason would have been obvious to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), who usually approaches these problems, however complicated and abstruse, with a high degree of intelligence and precise analysis. I am sure that he will be the first to appreciate that the Clause, unlike a great many other parts of Part IV of the Bill, is not concerned with translating into the scheme of the Corporation Tax the existing provisions of the Income Tax Acts.
We are here dealing with a situation which is entirely novel and unprecedented. We are dealing for the first time with the appropriate method of taxation of a partnership of which one or more of the partners is a corporation. There cannot be many such bodies, but there are some. There are some partnerships in which one may have four or five limited companies and an individual, or partnerships in which there are four or five individuals and one limited company, the shares in which the individuals and the companies respectively participate. In such an unusual and hybrid organisation the composition I have described could vary in an infinite degree.
The Inland Revenue and the draftsmen have, therefore, had to apply their minds and adopt some rather special provisions for the taxation of such a concern. They have had to try to merge the provisions of Corporation Tax which are appropriate to corporate bodies with the provisions of taxation which are appropriate to individuals. It is not an easy task, because totally different principles apply.
The profits of a partnership consisting entirely of individuals are fully taxed and the amount of reliefs are limited. The amounts earned by the partnership are then added to the other income of the individuals who constitute the partnership. There is then the question which some individuals must face of perhaps both Income Tax and Surtax.
I thought that the remark about the Clause having been drafted with indecent haste was uncalled for. It has been carefully drafted and I regard it as a skilful attempt to combine what is required to give precise effect to this curious and unusual form of partnership in which some of the partners are limited companies. It is not enough to refer to subsection (1, b), because that must be read in conjunction with subsections (2) and (3).
The hon. Gentleman was right in that the theory is first to treat a partnership as if it were composed entirely of a number of corporations. One then makes an assessment on that basis. Then one must hive off from that assessment the amount of the profits referable not to the corporations, but to the individuals. That is the theory in subsection (1).
Under subsection (2), one provides that a company's share in the profit or loss in an accounting period or in anything else left on one side under the proviso to subsection (1) should be calculated according to the partner's interest during the accounting period, and the company is then charged to Corporation Tax as though it were trading alone. That, I suggest, is a fair and sensible thing to do.
Under subsection (3), one makes an appropriate arrangement—[Interruption.] I hope that I am not boring the Committee. I have been asked these abstruse questions at this hour of the morning, and it is only in deference and courtesy


to the hon. Gentleman that I am trying to satisfy his curiosity. If he looks at subsection (3), he will find that the tax treatment of the individuals concerned in the partnership is based on the supposition that the partnership is entirely composed of individuals, except, of course, as regards the calculations of income which, inevitably, have to spring from the Corporation Tax calculations.
I could explain all this by an example and give the hon. Gentleman a series of figures; but I think that that would he an intrusion on the good will of the Committee. I hope that the hon. Gentleman will accept from me that this is a very adroit and sensible solution to a somewhat complicated tax problem.

Mr. Barber: It may or may not be of any significance, but I did not understand a word that the Minister said, though I must tell the Committee that I am completely satisfied.

Mr. Patrick Jenkin: I hesitate to destroy any confidence entertained by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), but I confess that satisfaction has not so far crept up on me. But I shall not detain the Committee further. I shall write to the Minister on a point on which, plainly, I failed to make myself clear, since he has not answered my question, and I have no doubt that we shall be able to resolve the matter in that way.

Mr. William Clark: Will the Minister answer this question? He told us that, in the example of, say, four companies and one individual, one first computes as for Corporation Tax, next, one hives off for the four companies, and then, for the fifth, one does it for the partnership. Is there anywhere in the Clause a provision for a partner to have relief against his share of a partnership franked investment income in respect of his share of a partnership loss, as the difference between franked investment income and losses for Corporation Tax cannot be set off? If there is a partner's part of franked investment income, is it clear that it can be set off?

Sir Eric Fletcher: That is a most intriguing question. I do not want to be dogmatic about it, but my impression

is that the answer is in the affirmative. But, if the hon. Gentleman will allow me, I shall confirm my first impression and write to him.

Question put and agreed to.

Clause ordered to stand part of the Bill.

Clause 69.—(RESTRICTION FOR CLOSE COMPANIES ON DEDUCTION FOR DIRECTORS' REMUNERATION.)

The Chairman: The first Amendment selected is No. 689, and with it we are to discuss Amendment No. 354, in page 89, line 32, to leave out "£25,000 nor"; Amendment No. 355, in page 89, line 33, to leave out "shall it exceed"; Amendment No. 357, in page 90, line 26, to leave from the first "the" to the end of the line; and the two Government Amendments, Nos. 741 and 690, in page 89, line 33, to leave out "shall it", and in page 90, line 26, to leave out from "months" to the end of the line and to insert "each of the".

Mr. Diamond: I beg to move Amendment No. 689, in page 89, line 32, to leave out "exceed £25,000 nor".
This and the other two Government Amendments which go with it have the effect of removing the ceiling of £25,000 a year which the Clause prescribes as the maximum for allowable remuneration for Corporation Tax purposes for the directors of close companies other than whole-time service directors.
I shall, first, explain what whole-time service directors are, because this will come into our consideration from time to time. Whole-time service directors, as the Committee appreciates, are virtually employees. They are individuals who, holding office as director, work full time, do not hold more than 5 per cent. of the shares and, therefore, do not have any serious measure of control. They work for a company, being treated for all purposes, therefore, as though they were salaried employees; and they do not enter into our calculations as regards limits at all. Now in everything that we say about these Clauses on close companies I will assume that service directors are excluded and regarded automatically as if they were ordinary salaried workers.

9.15 a.m.

Mr. Barber: I am sure that the right hon. Gentleman will agree that we are concerned with the words in Clause 69(3),
… applying to directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity …

Mr. Diamond: There are three categories of directors. I want to say to the right hon. Gentleman that if we can remove one category it leaves two. It is easier to comprehend two categories rather than three. If we get rid of the third category straightaway then everyone understands what we are talking about when we refer to directors' remuneration excluding those directors who are whole-time service directors, as already explained.
These Amendments abandon the ceiling of £25,000 a year. I have to explain, although I am sure that the Committee understands it fully, that in Corporation Tax as in Profits Tax, one has to take reasonable steps to see that, where a company is easily controlled by a small group of individuals, they behave—shall I say—normally with regard to the distribution of their profits.
Normally, in a company not in the control of a small group, the directors pay a reasonable amount of remuneration to themselves and then they have regard to dividends. What they would not do if they were not in control would be to receive all the profits by remuneration. They would like to do this now that we have a Corporation Tax because this would mean that there would be no Corporation Tax assessment of the company; and there would be tax avoidance. It is, therefore, essential, as it was with the Profits Tax, to put a sensible limitation on directors' remuneration.
There are two other categories of directors and they are the only two about which we are talking now. Firstly, there are those engaged full time in the service of the company and who own more than 5 per cent. of the shares. The second category is any other kind of director who may work part-time, full-time, little-time—even come-along-once-a-month directors. So far as these two categories are concerned, there is a maximum remuneration which they are entitled not only to draw but having drawn to set

against profits for Corporation Tax purposes. Of course, there is no limitation to the amount a company may pay, but merely a limitation to the amount allowable to be set off against profits for Corporation Tax purposes. We are considering the maximum which can be paid by a company which is affected by all these Amendments.
I recognise that under the Corporation Tax, close companies cover a wider field and larger companies than those in the previous similar appellation of a "director controlled" company which was used for Profits Tax purposes. We are moving into the field where there are larger companies and larger profits and perhaps more directors and certainly where there is a need for more skill and appropriately more remuneration. We can, therefore, base our calculations on the Profits Tax formulae, but we have to have regard to the fact that larger profits will be made by companies covered by these provisions than previously.
Therefore, it is right that the maximum we are now to consider should be fully as great as, if not greater than, it was before. The previous arrangement was that there was a maximum percentage and a ceiling beyond which the figure calculated by reference to that percentage could not rise. The ceiling proposed for Corporation Tax purposes in the Bill was £25,000. The percentage limitation of 15 per cent. has been in existence for a very long time and, of course, as it is a percentage the amount of the remuneration rises according to the amount of profits.
Fifteen per cent. of £20,000 is more than 15 per cent. of £l0,000—approximately, even at this hour of the morning, I think, it would be about twice as much. I am grateful to the Committee for following me with such close attention.

Mr. Emrys Hughes: This generosity does not appeal very much to me. What will the cost to the Exchequer be?

Mr. Diamond: I am only explaining the background. My hon. Friend need have no anxiety, not even the anxiety which we recognise north of the Border and in the Treasury. I am merely describing the limitations on remuneration which are permissible in calculating Corporation Tax and I have explained


that 15 per cent. is an appropriate figure that has been with us a long time and that, its being a percentage, there is no reason to vary it, but the ceiling has been varied and increased to £25,000.
On second thoughts, however, the Chancellor, having regard to representations made, feels that there is no longer any need to impose a limit of this kind, since substantial profits will be made by some of the large companies that will be affected by the new legislation. He is, therefore, suggesting that the ceiling of £25,000 should now be abandoned.

Mr. van Straubenzee: With the moving of this Amendment we come for the first time to the close company section o the Bill and I think that it will not have been lost upon the Committee that the very first action of the Government is to make a major concession in the Bill as originally drafted. In fact, if the Chief Secretary had been moving a Second Reading of the Bill, he could not have put it more succinctly and, indeed, argued it more carefully. One would have had to listen to his speech very carefully to have detected that what he was doing was to concede frankly that the original limit of £25,000 simply did not make sense.
It did not make sense because, as the right hon. Gentleman said, the definition of close company as it now is in the Bill brings in to the provisions of the Measure a far wider range of companies than, I suspect, was at first appreciated in the Treasury, and even if it was at first appreciated in the Treasury then the figure of £25,000 in the Bill was entirely nonsensical.
I think that the right hon. Gentleman was a little less than generous. He might have acknowledged the fact that, without any difficulty whatever, he could have accepted the Opposition Amendments on exactly this point. They have been on the Notice Paper for much longer than his. The relevant Opposition Amendments start at No. 354; his at No. 689. The plain fact of the matter is that this is an example where the Chief Secretary appreciated that his arguments could not stand up to the assaults which would be mounted against them once the Opposition Amendments were moved.
It therefore follows that I personally hope that the Committee will accept the Chief Secretary's recommendations which are, almost word for word, those which would have been put up from this side of the Committee. We really cannot allow this first incursion into the close company discussions to go by without just recording the fact that this is essentially an initiative taken from this side of the Committee.

Mr. Barber: It would be ungracious of me not to express our gratitude to the Chief Secretary and the Chancellor for accepting precisely the same suggestion made by my hon. Friends. The only difference between our Amendments and those in the name of the Chancellor is one of grammar, a difference which has no doubt enabled the Chancellor's to get in a little earlier on the Notice Paper.
It is an astonishing reflection on the Chancellor's understanding of the business world that he could ever have thought that an overall limitation of £25,000 could be appropriate. As the right hon. Gentleman the Chief Secretary has pointed out, we are no longer concerned with the old Section 245 companies. We are concerned now with many far larger public companies as well as family businesses.
There is another factor which I would have thought the Chancellor would have taken into account from the very beginning and that is that any remuneration which is disallowed by virtue of this Clause will be liable to Corporation Tax at 35 per cent. or 40 per cent., whereas previously, under Profits Tax it was liable to tax at only 15 per cent. It has taken the Chancellor weeks after the publication of the Bill to pluck up sufficient courage to table this very simple Amendment. The business world will doubtless be grateful that the Chancellor is learning, albeit a little tardily.

Mr. Harold Lever: I want to welcome, because no one else has welcomed it with sufficient cordiality, the Chancellor's cooperation in this matter. I should like to go on record as saying that I see no reason at all for any restriction upon remuneration of directors, because in my opinion the loss of Corporation Tax becomes irrelevant when one has regard to


the fact that money paid out would immediately fall within our very adequately severe and progressive system of tax, for Income Tax and Surtax. That is something the Inland Revenue might bear in mind when they are troubled about the avoidance of the Corporation Tax when a salary is paid. Everyone is reasonably satisfied that the Chancellor has gone a long way to meet the objections to the original drafting.
There is one thing I would urge upon the Chancellor. If income is disallowed in this manner for the purposes of the profits of a company and is hence written back for Corporation Tax purposes, and hence for purposes of deduction of Income Tax and Surtax from the company's profits, it should not be assessed upon the director as well, because if it is it would produce a penal result which I am sure the Chancellor would not want.
I may have read the Clause hastily, but, as I read it, if a company erroneously pays out something beyond the permitted salary this sum is not allowed for tax purposes to the company in computing its profits and the money thereby accruing to the company, or deeming to accrue to the company, is available for dividends and can attract Surtax in the hands of the shareholders. In those circumstances, it would surely be wrong that the company should pay Income Tax and Surtax upon these profits and then the director who received the money should pay Income Tax and Surtax upon the same profits.
9.30 a.m.
If I am wrong in thinking that that is the position the Chief Secretary will, of course, correct me. If I am right, I should like him to say whether he really thinks it is necessary for any purpose at all that these profits should be taxed twice in this manner, if such an error is made by a company.

Amendment agreed to.

Further Amendment made: In page 89, line 39, leave out "shall it".—[Mr. Diamond.]

The Chairman: With the next Amendment, No. 356, we can take Amendment No. 358, in page 90, line 2, leave out "£3,500" and insert "£5,000".
Amendment No. 359, in line 3, leave out from "directors" to "who" in line 7.
And Amendment No. 360, in line 10, leave out from "directors" to end of line 24 and insert:
below the aggregate remuneration of such directors with an overall limit of £5,000 for each such director".

Mr. van Straubenzee: I beg to move, Amendment No. 356, in page 89, line 33, to leave out "fifteen" and to insert "twenty-five".
I am sure you will appreciate, Dr. King, that the effect of this Amendment, and of those which you have been good enough to say may be discussed with it, is, first, to substitute 25 per cent. in subsection (1) for the permitted deduction of the remuneration of directors—I am also using the word "directors" in the sense in which, earlier, the Chief Secretary used it, and helpfully, if I may say so—and secondly, in sum, to make £5,000 the minimum figure in subsection (2), very much to simplify the provisions of both subsection (2) and subsection (3), and to limit to £5,000 the individual payments in these circumstances. I am only summarising, because I am quite certain the Chief Secretary has before him the effect of the Amendments on the Clause as a whole.
In moving the Amendment—at this advanced hour I shall do so more shortly than would otherwise have been the case—I am encouraged by the interjection of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), although, frankly, I myself could not go as far as does he in advocating that the Clause should have no restriction at all. The Chief Secretary will notice that we are not arguing to him that there should be no restriction at all. We are in the first half of the Amendments seeking to persuade him that in present conditions, and even allowing for the valid point—and I take the valid point—of this being a percentage, with the very much wider range of companies included in the term "close company" 25 per cent. would be a more realistic figure, and that certainly the individual figures of £5,000 in the second series of the Amendments would be far more appropriate in modern conditions.

Mr. Harold Lever: Since the hon. Gentleman has said that he is in agreement, and since he thinks it a sensible


idea to govern these things on percentage of profits, may I put this to him? Suppose a company has a bad year and its profits drop. Is that a reason for penalising the shareholders again, by refusing them the right to pay the directors the normal salary? Or does the hon. Gentleman think there is an even better way of dealing with the matter?

Mr. van Straubenzee: No. It is a reason, surely, for accepting the second half of the series of Amendments, which make the resultant position in that case very much better than it is under the Bill as drafted. But I think the hon. Gentleman has a valid point, which, I have no doubt, will be gone into further daring our discussion.
It may very well be that the Chief Secretary will be tempted to suggest to the Committee that the figure as it now stands as now amended, as a result of the last Amendment, does represent a substantial advance, or at least an advance, on the Profits Tax rules. I suggest to the right hon. Gentleman that this argument does not allow for a point made earlier by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), that the effect of the Corporation Tax on the disallowed deduction is savagely greater than it is under present legislation.
Secondly, the Profits Tax rules, applying as they do to director-controlled companies—which means exactly what it says—are now extended to a very much wider range of companies, so that, by virtue of the provisions of Schedules which we have yet to discuss, a person may well find himself losing his status of a whole-time director because of the 5 per cent. holding, perhaps in the hands of members of his family.
The second series of Amendments seeks to bring up to date the levels of remuneration. For example, it is present practice to grant earned income relief in full up to £4,005. We do not start imposing Surtax on earned income until £5,000. I therefore suggest that the proposed figures are far more in keeping with present-day conditions and the present-day sense of what is proper by way of remuneration over a wide range of companies which have been brought into the Bill.
The Bill as drafted suffers from the defect that the figures inserted by the

Chancellor—or, indeed, by my Amendment; and this must be so by virtue of it being an Amendment—are fixed in the Bill. They are fixed and immovable figures. If, after a time, it was thought wise to increase them, this would involve an Amendment to the Act, as it would be by then, which would be a far more cumbersome procedure, and I suggest to the Chief Secretary that it might be worth considering taking power to vary these figures by Order, though I hope that as result of the arguments that I have put to him he will think that the combination of 25 per cent., on the one hand, and what I loosely call the £5,000 figure, on the other, makes more sense in this modern day.

Mr. Gresham Cooke: I rise to support my hon. Friend the Member for Wokingham (Mr. van Straubenzee), and to observe that when we were dealing with the Corporation Tax Clauses the Chancellor treated individuals and companies as two separate sets of beings, yet now, when we have come to the close company Clauses, the right hon. Gentleman seems to have turned round on the other tack and to be treating individuals and companies as one being. He is treating them as indissolubly linked, and this is a very serious matter for large sections of British industry, I am told that Marks  Spencers and Jaguar Cars are close companies. I know that the same is true of Rootes, and in this connection I declare an interest, because I am connected with the company, although not, of course, a controlling director.
This Clause seems to be responsible for anomalies and unfairness. Surely we should not penalise an individual director by making him pay more tax than he would pay if he were an individual director of an ordinary company. Let us take a one-man company with profits of £20,000 a year, before tax at present. If it made an extra £1,000 and that were paid out, I take it that the individual would pay tax on that £1,000 to the extent of £912—being 8s. 3d. in the £ on £1,000 and 10s. in the £ in Surtax. In a close company he would pay 40 per cent. on £1,000, less 15 per cent., which would be £340, and 8s. 3d. on the next £660 and 10s. on the next £660, which would make £942 in all—£30 more than the director of an ordinary company.
I would like to have seen the limit done away with altogether. If the profits were paid out as remuneration, why not take it by way of Surtax and Income Tax, in the normal way? What happens if the company makes a loss, or a very small profit? The 15 per cent. limit applies very harshly in this case. If the remuneration of directors is more than the profit the balance must be added back and for tax purposes a genuine loss can be turned into a profit. Surely that is very inequitable.
One solution would be to adopt the old definition of a Surtax company instead of a close company for all these companies, and put them under Section 252 of the Income Tax Act, 1952. In my view, and in the view of the companies involved—and very large amounts are paid out in remuneration in some of them—and in view of the fact that the directors would have to pay it in Surtax and Income Tax anyway, the least the Chief Secretary could do would be to raise the limit from 15 per cent. to 25 per cent., if not to get rid of it altogether.

Mr. Paul Bryan: I am a director of a close company, and come from an area—Yorkshire—which abounds in close companies. Hon. Members on this side of the Committee have been slow to recognise the underlying Socialist objective of this Bill. We all expected an anti-business Bill and an anti-private enterprise Bill, and that we have certainly got, but we have not recognised that this is only phase one in the campaign against private enterprise. This is the attack on the small company and, in particular, the family company. Once the small companies have been hamstrung the others can be dealt with.
My hon. Friend the Member for Wimbledon (Sir C. Black), in an earlier speech, put up a case which was unanswered—because it was unanswerable—stating the effect of Corporation Tax on the small company. He showed that the increase in tax suffered by the small company was far more severe than the increase on a large company. I can think of no small company which benefits from the Corporation Tax. Each one is bound to suffer. Quite a number of the big companies, on the other hand, will benefit.
During the proceedings on the Bill the Government have been pushed, sometimes ridiculed, into making about 200 Amendments. Any concession that has been made has been in respect of the bigger companies. Today's concession is a perfect illustration of the point. We have had the £25,000 concession but no other concession whatsoever. As it stands the Clause is absolutely ludicrous and quite unfair to the smaller companies.
I wonder whether the Chancellor has any idea of the scale of reward in British industry today. I would invite him to look at last week's Sunday Times, at the advertisements of Management Selection Ltd., which is, I suppose, the biggest and best-known of the executive agencies. There are nine advertisements this week, and five of them offer a figure of £3,500, mostly with pensions, and the "preferred age", as they call it, is, in most cases, in the 30s or early 40s. That is a fair sample, and shows that, early on in their lives, these executives can expect to earn this sort of sum. Needless to say, 20 years later, when they are 55 or so, still in the prime of their business life, they can expect to earn a good deal more.
9.45 a.m.
The figure of £3,500 is absolutely out of tune. I wonder where the Chancellor has got this figure from, and how he has thought it up. He has said that he has not missed a single Division on the Finance Bill. I would willingly pair with him for a couple of days if he would go on a pilgrimage into British industry and look into the question of salaries.

Mr. Emrys Hughes: Mr. Emrys Hughes rose—

Mr. Bryan: Not just now.
I am not inviting him to ooze abortive charm at City boardroom lunches, but to go to Manchester, Liverpool, Leeds and Sheffield, where real manufacturing takes place.

Mr. Emrys Hughes: Will the hon. Gentleman continue the pilgrimage into my constituency, where a large number of miners, working on the surface, are asking for £9 15s. a week?

Mr. Bryan: It is the Chancellor whom I am inviting to go on this pilgrimage. Perhaps the hon. Gentleman will put it to him.
The Chancellor has only to look at the nationalised industries to realise that £3,500 would not get one very far there. I see from the Daily Mirror that the author of the Bill, Dr. Kaldor, gets £4,000 a year for three days' work a week. Recently, Mr. Leslie Jenkins was appointed Chairman of the Forestry Commission at £5,000 a year on a part-time basis. I am not saying that these sums are excessive; from them one gets some idea of what is paid and what is fair.

Sir D. Glover: Would my hon. Friend not agree that the famous Dr. Beeching got £24,000 a year?

Mr. Bryan: One can easily see the purpose of this limit. What I am trying to point out now is that £3,500 is unreasonably low and out of touch with modern requirements
I should like to give the Committee one or two examples of the absurdities into which this Clause will lead us. Take the case of a company with a capital of £100,000 and making a profit of £20,000 a year. A director of that company can be paid any salary provided that he has no shares in the company. Say that we pay him £6,000 a year. If he is thrifty and saves £5,000 in shares, that is when, under the provisions of the Bill, the company will be told, "You cannot pay him that any more. You must reduce his salary to £3,500". Where is the sense in that?
Earlier, the Chief Secretary was saying that the Government are in favour of any sort of saving. This is absolutely against it. The Chancellor might argue that, with a company making an annual profit of £20,000, that director ought not to be paid £6,000 a year. But what the hon. Member for Manchester, Cheetham (Mr. Harold Lever) said in this context was absolutely right. The company may normally make £40,000 or £50,000 a year, but gets into a bad time and the profits go down to £10,000 a year. A natural reaction might be for the board to say, "We must get in somebody to put our production right; or our sales right". They might then have to offer £6,000 a year, and the commonest occurrence in a smallish company is to give such a man the chance to acquire shares in the business. But he will not be able to acquire

them while earning £6,000 a year—though he can if he accepts only £3,500 a year.
I cannot think that the Bill is meant to have this effect. I ask the Chief Secretary to think again. If a director is thrifty and saves to buy shares he can only be paid £3,500. If he does not do so the sky is the limit. Where is the sense in that?
Let me give the case of another company making, say, £40,000 a year, with two directors, both with a 5 per cent. plus holding. Under the Bill, they can only be paid one at £3,500 and the other £2,500. When one of them asks for an increase in salary he will have to be told, "We cannot give it to you without an enormous cost to the company unless you sell your shareholding." How can that be right or healthy? As soon as he sells his shareholding he can be paid £10,000. Surely that is wrong, and I should like to hear the Chief Secretary's justification.
A third case is even more stupid. A director is working for a company, earning £5,000, and has a 4 per cent. holding, Then his brother joins the company and buys a 2 per cent. holding. At once, the salary of the first director must come down from £5,000 to £3,500, otherwise the company will be very heavily penalised. So, once again, because of a tiny family influence, the company will suffer excessive tax.
The last case really does earn the Oscar for the frightened Socialist obsession with the family company. Let us imagine a works manager of 55 earning £5,000 a year. He has a 4 per cent. holding. His son comes into the business, and the father must tell him, "For goodness' sake, do not save any money and buy 2 per cent. of the shares, otherwise, between us we shall be associates holding 6 per cent. of the shares, and my salary will have to come down." That is because they have committed the cardinal sin, in Socialist eyes, of overmuch family interest—and that overmuch family interest is a 6 per cent. holding in a company.
What it boils down to is that there is a Socialist vendetta against the family firm which is both malicious and pathetic. Why should that be? We have many family firms to which the country owes


a lot. Marks and Spencer, Pilkington, Sainsbury—they do not ask for favours. They lead in their own field by their own excellence, and still are to a high degree family managed. But if Marks and Spencer, when they started in that small stall in Leeds market-place, had done so under the present breed of Government, they would never have got off the ground.
This Socialist obsession against individual success permeates the Bill. The affront to all Socialist thought is the man who was a bricklayer 10 years ago, started a business, and now has a Jaguar. In their eyes money-making of any sort is bound to be a "fiddle". In the early stages of the Bill, we on this side of the Committee were constantly racking our brains for metaphors of the sledgehammer-to-crack-a-nut variety. We were wrong. As we go on, I see that a far more accurate metaphor would be that of the small boy who was once stung by a bee and ever since has always taken a nervous and nasty delight in tearing off bees' wings.

Mr. Maxwell: In the early days of our discussion of the Finance Bill, the right hon. Member for Bexley (Mr. Heath) was good enough to refer to an advertisement that I placed in various newspapers inviting proprietors of private companies to approach me for the purpose of acquiring their shareholding—

Mr. Heath: Avoiding penal taxation.

Mr. Maxwell: Avoiding penal taxation—yes.
As a result of that advertisement, I have had contacts with several hundred limited private companies, and I should like to tell the Committee of the kind of thing that this Clause intends to do away with. I am sure that the Committee will agree that we need to do away with many private companies owned by individuals who give no time to them at all.
The owners do nothing at all to make those companies thrive. They use the profits to hire management and pay it well. They use these profits to pay fantastic salaries, obtaining the benefit of earned income relief. [Interruption.] These are not minor amounts, I would say to my hon. Friend the Member for

Manchester, Cheetham (Mr. Harold Lever).

The Chairman: Order. I hope that the hon. Member will address the Chair.

Mr. Maxwell: The earned income relief practice, on the kind of scale that is going on, is not minor.

Mr. Emrys Hughes: When the hon. Member uses that word does he spell it "minor" or "miner"?

Mr. Maxwell: I do not mean the ones that go underground.
We have had a hard day's night and I am sure that the Committee will agree that it is right, necessary and timely that this way of earning money, when the recipients are doing nothing to help these companies produce that income, ought to be stopped. It is not fair, because it really means that other taxpayers are bearing an unfair burden.

Mr. Patrick Jenkin: Would the hon. Member agree that the description of the director he gave could not possibly be described as a director who has to devote a substantial amount of time to the business?

Mr. Maxwell: I agree, but Members who are chartered accountants will tell him that the practice is widespread and ought to be put a stop to.

Sir Tatton Brinton: Would the hon. Member not agree that we are talking about two different things? This Clause deals with tax on companies. If they pay directors of this type more than £3,500 or £2,500, it has nothing to do with the amount actually paid by the company for that director's earned income relief, which he is talking about. The company can pay £10,000 to that director, who himself will have the earned income relief.

Mr. Maxwell: The hon. Member is wrong. [HON. MEMBERS: "NO."] I hold the opinion that the hon. Gentleman is wrong. If he is right I would like to check it. Perhaps the Chief Secretary would be prepared to develop that point. [HON. MEMBERS: "Arbitrate."] Right hon. and hon. Members opposite really must stop pretending that they are the party that is interested in business, and want to help it, and that we on this side wish to penalise it.
The purpose of the Budget is to help people to earn money and to penalise those who make money. What is wrong with that? Right hon. and hon. Members on the Opposition benches must also get this straight: the purpose of this Budget is to bring about a disincentive to investment abroad. We want more investment in this country. We wish to penalise those people who have been spending time and making a great deal of money without earning it.

Mr. Barber: The hon. Member will appreciate that the people who are being penalised by this Clause are directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity.

Mr. Maxwell: The idea that there are hundreds of thousands of directors with 4 per cent. or 2 per cent. in private companies is utterly stupid. The bulk of private companies are owned and controlled by families. Certainly, a few individuals have small holdings in these private companies, and they will have an option to dispose of the holdings. [HON. MEMBERS: "Oh."]What is wrong with that? We are quite frank in admitting it.
We must put a stop to this nonsense of paying oneself out of a private company income which one has not earned or accumulating it merely for the purpose of paying oneself one day a capital gain. The time has come when people on P.A.Y.E. should no longer be penalised at the expense of those who possess capital or who control companies which give them an opportunity to pay themselves in excess of what they have earned. If they want to pay themselves more than £3,500, let them pay the proper taxes introduced in the Bill, which I am sure the country will come to realise is both fair and necessary.

10.0 a.m.

Mr. David Mitchell: I listened with fascination to the hon. Member for Buckingham (Mr. Maxwell), who began by telling us that the Budget is designed to end the ownership of businesses by non-working proprietors. Does he realise that the capital gains proposal in the Budget is an extreme disincentive to any proprietor to sell his business, be-

cause in future 30 per cent. of the appreciation of the business will be confiscated? Any proprietor in future who is approached by the hon. Member for Buckingham or any other take-over bidder will seriously ask himself whether he wishes to see a major slice of his capital confiscated by the Chancellor or whether he should leave it in the business.

Mr. Maxwell: The United States has had a Capital Gains Tax for many years and a great number of businesses have grown and prospered—and the number of millionaires has grown and prospered. It is surely time that the people with capital should pay their fair whack in the same way as those on P.A.Y.E.

Mr. Mitchell: That does not alter the case that I made. The hon. Member may be an expert on millionaires. I do not pretend to be an expert on millionaires.

Mr. George Y. Mackie: Would not the hon. Member agree that there appears to be a strong objection to the creation of certain types of millionaire?

Mr. Mitchell: This argument is particularly relevant to the words referring to when a business is a separate entity from the shareholders who own and control it. But in the case of a close company, and particular a smaller family business, the whole thing breaks down. As director of a close company, I declare my interest. I have some personal experience and knowledge of what it is that drives these businesses on from generation to generation and what brings out the skill, ingenuity, energy and enterprise, so important for the country, which build up a business.
This has built up for the very human reason which drives human beings on—a family business to be passed on from one generation to another, plans for security in one's old age or for one's widow, or, indeed, for the personal rewards of success.
Quoted companies normally come from smaller family businesses, and time and again one will find in the records of a family business how for one generation there has been one proprietor, then his son has built it up a bit further, and then


a Stock Exchange quotation has been obtained and the company has grown into a bigger concern.
The hon. Member for Buckingham said that the purpose of the Budget was to encourage business. I should like to mention a practical example of how it will encourage, or otherwise, a business with a turnover of £100,000 and a profit of, say £15,000 a year. This is an example of a close company which, I wish to make clear, is not my own. Such a business might be worth £100,000. Out of the profits of £15,000 the proprietor takes his salary. Let us look at the figures. Forty per cent. is left in the business—that is £6,000. The proprietor takes out £9,000, of which £5,500 is disallowed for Corporation Tax. Therefore, the Corporation Tax payable out of the £15,000 profit is £4,600 a year. In addition to that, the proprietor of the business pays £2,107 in Income Tax and Surtax, leaving him with £4,693.
If one considers such a company over a 10-year period—a £100,000 business with inflation at 5 per cent.—if nothing spectacular is done within the business in respect of its growth it will be worth £150,000 in 10 years, purely by reason of inflation. If the present Government stay in office one can only suggest that the inflation will be greater than that, but let us work on the assumption of a 5 per cent. inflation. Therefore, if the proprietor passes the business on to his children he will have to pay Capital Gains Tax of £50,000. He has got to find £1,500 per annum. The Company cannot pay Capital Gains Tax. The proprietor has got to do that. That must come out of the £4,600. He is left with £3,193.
What would happen if that man, instead of sweating away at his business, were to put the money into a building society and get 4 per cent.? He would get £4,000 a year. He would pay £888 in Surtax and be left with £3,112. The net additional amount for all the hard work which he has put into that business will be £81 per annum, not enough to pay duty on a bottle of whiskey a week. Instead of spending his time playing golf, as he could do if he put his money into a building society, the man has worked up his business, "beavering" away each day, taking home books—

Mr. Maxwell: Mr. Maxwell rose—

Mr. Mitchell: I have given way already to the hon. Gentleman. I have checked these figures with an accountant. I ask the Committee: what a reward for skill, energy and enterprise!
One thing of which I am certain is that this will be so major a disincentive to proprietors to put their money into their businesses and build them up that we shall be heading for an economy which will be stagnant and in this country that is a prescription for disaster.

Mr. Diamond: We are dealing with two Amendments in the name of the hon. Member for Wokingham (Mr. van Straubenzee), the first of which seeks to increase the percentage limit which we previously referred to on an earlier Amendment, and the second one of which seeks to increase the individual amounts allowable to directors by £1,500 to £5,000. Perhaps it would be convenient for me to deal with the first Amendment first.
It is common ground between us that the 15 per cent. produces a larger figure the larger the profits. The answer to the hon. Member for Howden (Mr. Bryan)—I cannot remember whether he was in the Chamber when we were discussing the previous Amendment—is that the whole basis of these additional allowances is that the new definition will bring larger companies into consideration. That is why, to answer the hon. Gentleman's political comment, larger companies are involved. The whole argument by every section of the City, business representatives and all others, is that we are bringing into the net larger companies and, therefore, we must make adjustments accordingly. When the hon. Gentleman says that the Socialist Government looks after only the larger company, we take the argument for what it is worth.

Mr. Bryan: Is the right hon. Gentleman saying that smaller companies will benefit? Will not they be harmed both by this Measure and by the Corporation Tax?

Mr. Diamond: Vast numbers of small companies will pay no Corporation Tax at all and will be much better off in terms of their tax burden. Anybody who has been into the figures knows this. But we are dealing with a different matter.

Sir Eric Errington: Sir Eric Errington (Aldershot) rose—

Mr. Diamond: Perhaps I can go on with my argument on the Amendment which was moved quite some time ago and which relates to an increase—

Sir E. Errington: Sir E. Errington rose—

The Deputy-Chairman (Sir Samuel Storey): Order. The hon. Gentleman must not persist.

Mr. Diamond: We are dealing with an Amendment which seeks to increase the percentage limit which is used for the calculation of the maximum to be allowed for directors in certain circumstances in relation to the profits of their companies.
The first point I have made is that the 15 per cent. is an increasing figure if the profits are increasing. Secondly, it is a figure which has been with us for a very long time—ever since 1937, when we had the forerunner of Profits Tax, which was called National Defence, Contribution. It has been carried on from 1937 every year and during the term of office of every Administration, including the 13 years of the last Administration, with which the hon. Member for Howden had a slight political connection, right up to today. It has always been regarded for Profits Tax purposes, which is the exact parallel, as the right figure for allowing directors' remuneration.
The Millard Tucker Committee looked at this matter in 1951. Its view as set out in paragraph 321 was that
The existing alternative limitation, namely, 15 per cent. of the profits subject to a maximum of £15,000 should remain.
We have dealt with the maximum, but that Committee saw nothing wrong with the percentage. We have a situation in which we have a percentage figure which takes account of increasing profits of larger companies with larger profits. It is the figure which has been acceptable to every Government since 1937. It is a figure which has met with the approval of the Millard Tucker Committee, and now the hon. Gentleman, and several of his supporters, I take it, think that it should be increased to 25 per cent.
I am sorry that I cannot recommend the Committee to agree to such an adjustment.

Mr. Patrick Jenkin: Does not the right hon. Gentleman recognise that all the authorities which he has quoted were

working against a context of a Profits Tax, which only in the last two or three years reached 15 per cent.? We are talking about a tax which the right hon. Gentleman has been at great pains to point out is entirely new—Corporation Tax.

10.15 a.m.

Mr. Diamond: As I have pointed out previously, Profits Tax was, I forget for how many years, at the rate of 30 per cent. It appears, from the attitude of the hon. Member for Wanstead and Woodford, that he is aware, after all, that this was the case. In that case, why did he bother to say what he said?

Mr. Patrick Jenkin: The right hon. Gentleman should not try to mislead the Committee. [HON. MEMBERS: "0h."] Profits Tax was an entirely different kind of tax compared with Corporation Tax. It has been the burden of the right hon. Gentleman's case, throughout our discussion of the Bill, that we are dealing with a new type of tax—something that is simplicity itself.

Mr. Diamond: I assure the hon. Gentleman that I am not trying to mislead the Committee. I am trying to be open. I wish that every hon. Gentleman opposite was equally open. I am attempting to demonstrate why his party, long before he came to Parliament, was perfectly satisfied when in office, year after year, when this matter came up—indeed, for 13 years running—to leave the figure at 15 per cent., notwithstanding the fact that Profits Tax was running at the rate of 30 per cent. during part of that period; and this is an exact parallel.
The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said in a previous intervention that this is against a different background compared with Profits Tax. I am saying that it is exactly the same background and that Profits Tax was running at 30 per cent. We are now talking about Corporation Tax at 35 per cent. That is a reasonable parallel.

Mr. Patrick Jenkin: Mr. Patrick Jenkin rose—

Mr. Diamond: The hon. Gentleman can hold a different opinion if he wishes. Let us at least agree on the facts. Neither he nor I can withhold facts which are common knowledge.
The rate of 15 per cent. was held to be satisfactory and I am sorry to say that I cannot recommend the Committee to accept the Amendment. Nor can I give any indication whatever that my right hon. Friend is prepared to review the matter in regard to the 15 per cent. in any way at all.
The second Amendment relates to the absolute figures as opposed to the percentage. Here we are dealing with figures relating to the situation which will arise where one has one, two, three or four directors, with perhaps one who is not a director who is working full-time, but who puts in an appearance at one directors' meeting a month. We are not concerned with that point now. We are talking about the 15 per cent. and the first figure. I do not think that it is generally known that the first figure, which has been for Profits Tax purposes £3,000, and under the Bill is £3,500, would be the amount allowed if one were considering a company which had a number of whole-time service directors; that is, directors working all the time and being concerned with their work and not merely with their shareholding—and one director who was, perhaps, purely a consultant, perhaps a financial adviser, who attended perhaps once a fortnight.
For him there would be available a figure of £3,500 to be set off in calculating Corporation Tax under our proposals and the whole amount paid to the full-time service directors would be allowable whether £10,000 or £100,000, according to the extent of the profits available.

Mr. Mitchell: Is the right hon. Gentleman saying that a working proprietor running a business with one or two service directors with him can have anything he likes, so to speak? Presumably when the right hon. Gentleman refers to a director coming in once a fortnight it will make no difference whether it is once a fortnight or every hour of the day.

Mr. Diamond: The answer is, "No".

Mr. Geoffrey Lloyd: I take it that such a man as my hon. Friend the Member for Basingstoke (Mr. Mitchell) mentioned would be limited to £3,500?

Mr. Diamond: The right hon. Gentleman is correct. Such a man could have any amount of shares or none. He

would not have to work more than a small proportion of the time and the figure of £3,500 would be used in calculating the Corporation Tax liability.
The figure was £3,000 for Profits Tax purposes and remains so up to this moment. It was last adjusted a few years ago, and it might have been held to be due for further adjustment. The point I make is that in the Finance Bill a year ago, when right hon. and hon. Members opposite were in control, it was not sought to increase it beyond £3,000 for the purpose of calculating Profits Tax liability.
The figure we propose is £3,500, with additional amounts for each director who works and may hold a substantial number of shares at the same time—£2,500 each for the first, second and third, and so on. This brings us to the point that, if there are four directors of that kind, there can be £11,000 as the remuneration for them. In a large company making large profits, of course, one could take 15 per cent. of profits, with no maximum. The figures I am discussing refer to small companies. The big companies with big profits are concerned with a percentage.
Only in the small companies do these figures apply, and one must look, therefore—I want to be absolutely fair about this—at the small company making modest profits in which 15 per cent. of profits would afford no adequate remuneration for the board or for directors engaged. What we have to consider is whether these figures are sufficient for that kind of company.
My right hon. Friend is not saying that there could never be an adjustment. The hon. Member for Wokingham, who put forward his Amendment with great seriousness and cogency, suggested that there might be machinery for a quicker alteration in the figures than is provided for in the Finance Bill. I doubt that that would be necessary, and I doubt that consideration would have to be given at more frequent intervals than in Finance Bills; but he makes the valid point, which I take at once, that a figure fixed in a Finance Bill is not fixed for all time. Certainly, these figures would be open to review, and might well be reviewed upwards from time to time.
My own opinion is that the figures we suggest—£3,500 for one director, £6,000 for two, £8,500 for three and £11,000 for four—are about right. We


are talking the whole time of the smaller company. I do not say that in any circumstances would my right hon. Friend wish to assert that this was the precise figure, that one could measure it exactly and no other figure could be right. I do not want to be as dogmatic as that about it, but I must tell the Committee that my right hon. Friend would not be prepared to recommend at this stage—certainly not this year—a figure as high as £5,000 for the first director or one as high as £5,000 for each subsequent director, which would be double for the second, third and fourth.
There may be a consensus of opinion that something slightly more than £3,500 might be appropriate. I am not persuaded that it would be right. I think that the best figure I can recommend to the Committee is the one proposed in the Bill. In the Government's view, it would provide adequate remuneration in the smaller company, the bigger company being able to look to its 15 per cent.

Mr. Bryan: Will the Chief Secretary take the point made by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and myself about the company which makes quite large profits normally and then has to come down to a lower figure? Is it expected that, even if it is financially sound basically, the directors' salaries should then come down?

Mr. Diamond: It is provided here that these are maxima. These maxima do not relate to profits at all. If there are no profits and there are four directors, for instance, there is nothing to prevent the board paying £11,000 in directors' remuneration out of no profits, if it thinks fit so to do. The remuneration of the full-time service director who works a full day and has a shareholding of less than 5 per cent. and is interested in the work and not just in being a shareholder, is deductible in calculating Corporation Tax.
There is no justification for the first Amendment in our present practice. That is our view. On the second Amendment, I do not wish to be dogmatic and say that the figures are precisely right for all time. We would be prepared to look at it from time to time; but my recommendation to the Committee is that it should not accept this Amendment.

Mr. George Y. Mackie: Could the right hon. Gentleman clear my mind?

I thought that it was clear before his speech. Is he now saying that if a company has four full-time working directors who own 25 per cent. of the shares each then they cannot be paid more than £11,000 without penalty?

Mr. Diamond: In a small company, yes; the hon. Gentleman is quite correct. In a large company they can be paid 15 per cent. of the profits. The hon. Gentleman could work out the figures.

Mr. Geoffrey Lloyd: I listened with interest to the right hon. Gentleman and I would suggest that his mind is inclined to be open on the figure of £3,500. This is a very drastic prohibition and anything more would mean that before a business could expand it would have to be grossed up.

Mr. Diamond: If you pay more than the figure which is the maximum for the calculation of the Corporation Tax the extra amount would not be allowable for Corporation Tax purposes.

Mr. Geoffrey Lloyd: I do not think that the Government are wholly aware of the permutations which can be made in the organisation of perfectly genuine private companies. I would like to mention a business in the Midlands which was built up by two brothers who died some years ago. Their intention was to pass the business on to their sons, but the two sons joined the R.A.F. and were killed during the war. The business went to four daughters, who were quite properly advised by their business advisers to bring in a manager. This they did.
They were further advised to give this full-time manager a stake in the business. After the shares were valued by the auditor he was given 10,000 shares, which brought him above the 5 per cent. so, technically, he is a participator. He worked full time and was quite unlike the man which the Chief Secretary mentioned in a rather discreditable way who only spent one day a week working. I do not think the hon. Member for Buckingham (Mr. Maxwell) built up his business by spending only one day a week working. He is, technically, a participator.
As the firm to which I refer had to compete for a manager in competition with large firms such as I.C.I. and Courtaulds, it was advised, quite properly, to pay its manager about £5,000 a year.


This is the kind of thing the Government have not taken into account. I hope that they will be prepared to reconsider this figure now.

10.30 a.m.

Mr. William Clark: We have had an interesting discussion on Amendment No. 357 so ably moved by my hon. Friend the Member for Wokingham (Mr. van Straubenzee). The two Amendments are the difference between the 15 per cent. and 25 per cent. for the directors receiving remuneration and the £5,000.

Mr. Maxwell: Mr. Maxwell rose—

Mr. Clark: Before the hon. Member for Buckingham (Mr. Maxwell) interrupts me, perhaps I could deal with him. What he did not say to my right hon. Friend the Member for Bexley (Mr. Heath) when he referred to the advertisement was how many replies he had. He did not say what advice he gave to clients. I think that if he had given them the same advice as he has tried to give to this Committee, he would not have had many clients as a result of that advertisement. It is nonsense for the hon. Member to think that we have directors going round the country doing no work at all and drawing huge salaries from close companies. That is just so much nonsense.
I would suggest to the hon. Member for Buckingham that he should have a word with his hon. Friend the Member for Heywood and Royton (Mr. Barnett) and also with the Chief Secretary in his professional capacity. They will advise him that in order to get these allowances and minima one has to be substantially a full-time director, and if a person cannot satisfy a local inspector of taxes on that score he cannot get the allowance for that director. I hope that the hon. Member for Buckingham will agree he was entirely incorrect.

Mr. Diamond: We attach great authority to what the hon. Member says from the Dispatch Box. It should be, except the first one.

Mr. Clark: Yes, except the first one, the shareholding one. I ask the hon. Gentleman—

Mr. Maxwell: Mr. Maxwell rose—

Hon. Members: Give way.

The Deputy-Chairman: Order.

Mr. J. J. Mendelson: Disgusting. The hon. Member has made an attack.

Mr. Clark: I have not made an attack. I have tried to correct some of the remarkable statements the hon. Gentleman has made. What I did not say and the Chief Secretary has reminded me, is that in the case of the first director who does not have a shareholding in the company and has no limit, obviously he can be paid as much as one likes. But that was not the point of the hon. Member for Buckingham. He says that people owning these companies are going round the country and doing no work.

Mr. Mendelson: On a point of order. Is it not the custom and practice in Committee of the whole House that whenever an hon. Member from the Front Bench attacks or criticises a statement made by another hon. Member he gives way to allow a reply to be made? We do not want to create first and second-class hon. Members in this House.

The Deputy-Chairman: No such rule applies that I know of.

Mr. Clark: I wish to pay tribute to what the Chief Secretary said. Now I will give way.

Mr. Maxwell: I am obliged to the hon. Member. The fact is that he is quite right in saying that this advertisement did not produce many clients, for the very reason that I was unable to pay them the kind of prices that they would need to have in order to continue to benefit from the earned income for work which they had not earned. That is the first point. The second point is one which I hope the hon. Member will answer from the Front Bench. I am sorry it was so late when we started discussing this point. It is of considerable importance to hundreds of thousands of people in the country. Very important points are involved here.
As the Finance Bill stands at the moment larger companies are entitled to pay 15 per cent. of their profits without any limitation. Hon. Members opposite, including the hon. Member for Cheadle (Mr. Shepherd), are complaining that if a company's profits take a turn down then the directors will have to be reducing


their salaries. What is wrong with directors reducing their salaries when the companies are no longer making the kind of profits that allow them to pay themselves 'high salaries? Why should hon. Members opposite defend directors who do not earn the good profits that enable the paying of these high salaries?

Mr. Clark: I have no doubt that in time, the hon. Member for Buckingham will be taking his place on the Front Bench. With his wide knowledge, I am sure that the present Treasury Ministers will be delighted to welcome him.
The underlying principle of both these Amendments is the fact that they apply to close companies. We have had examples given by some of my hon. Friends, such as Marks and Spencers. I believe that Butlins may be, and Jaguar motor cars. These are probably caught under the close company rule. What I would have thought the Chief Secretary must have recognised, as my hon. Friend the Member for Howden (Mr. Bryan), in an excellent speech, pointed out conclusively, is that the provisions for the Corporation Tax would hit the small company, the one- and two-man business, the working directors.
As always the Chief Secretary, and I hope he will not mind me saying this, came back to the specious argument and said well, it was the same for Profits Tax, the Conservatives were in for 13 years and did not do anything about it—the minimum-maximum percentage and the minimum per director. True, but he does not say that this Corporation Tax is something we have never seen in our fiscal system.
If we are going to operate the Corporation Tax as Profits Tax was operated with rebate between £2,000 and £12,000 and one-fifth—this is something we have lost as far as Profits Tax is concerned. If 1-e is also going to say that—as we do for Profits Tax now—legitimate charges paid to participators are to be allowed against profits for Corporation Tax purposes, and if he is also going to say that in the Corporation Tax, like the Profits Tax, we will allow charges which under the Bill at the moment are disallowed, then the Chief Secretary has some room for saying that Profits Tax and Corporation Tax can be compared. But there is no comparison at all between a 15 per

cent. Profits Tax and a 40 per cent. Corporation Tax with all its restrictions, with no abatements, and interposing the minimum and maximum for directors' salaries.
I am convinced, and I am sure the Chief Secretary and the Financial Secretary in their own minds know this, that this is going to hit the small businessman. If we take a one-man company and the man earns £5,000 himself, my information is that he will be allowed to charge and pay himself £5,000 of the capital or the 51 per cent. or whatever. He will be able to charge £3,500 and he will be liable for Corporation Tax on £1,500. So the £5,000 a year man is going to pay £600 Corporation Tax. What for? This is supposed to help. As my hon. Friends have said this is quite obviously going to hit the small businessman.
Of course the abolition of the £25,000 maximum ceiling that was triggered off by the Amendment of my hon. Friend the Member for Wokingham and other hon. Members will only help the large companies. It is the small companies that we are speaking about in this Amendment. I have many examples here that I could give to the Chief Secretary. We have been sitting for some time but, if I might with the permission of the Committee. I should like just to give two examples. I promise the Chief Secretary that I will send details to him if he wishes.
May I give an example of a close company with three directors, two of them full-time and one of them part-time, and a profit of £50,000? Assume that the director's actual remuneration is £16,200. Under existing provisions, the tax paid by that company—Profits Tax and Income Tax—is £20,318 on a starting profit of £50,000. Under the Corporation Tax, the same remuneration is paid to the directors but the £16,200 is disallowed. If we take distribution into account we find that the actual tax paid by the company under the Corporation Tax is £23,311 compared with £20,318.

Mr. Diamond: The hon. Member has forgotten the most relevant figure, the proportion of distribution.

Mr. Clark: I have taken that as 60 per cent., the ceiling under the Bill at the moment. That is the only figure I could take as we have not yet reached that Clause.
It is interesting to look at the effect on the company itself. Under existing conditions this company with a £50,000 profit can retain in the business £10,544. Under the new provisions it can retain in the company £1,500. Where is the argument that this will lead to more retention. This is a typical company with three or four directors making £50,000 profit. It pays £3,000 more in taxes and the retention in the company is reduced from £10,000 to £1,500. I could give many such examples, but I will not weary the Committee at this hour.
The Government cannot continue to hide behind the fallacy that Corporation Tax is the same as Profits Tax. They are entirely different, and it is about time the Treasury Bench and hon. Members opposite realised it and admitted that this was an entirely new tax bearing no comparison with Profits Tax. What my hon. Friends and I have said proves that the Government do not know which way to go. Where is their modernisation? Does this Clause suggest that there will be modernisation when we see what happens to retentions in small growing businesses?
Take the example of the executive and managerial class. What happens if one says, "Here is a stake in the business"? I am sure that the Liberals agree, as we all do, with the principle that employees and executives should have a stake in industry. If one offers an executive a 6 per cent. holding, immediately the tax position goes haywire and his salary goes down or the company is penalised. Where

is the incentive in an ordinary business? Where is the plough-back? It does not exist.

More and more as we go through the Bill we realise to our regret and dismay that the Bill was printed without the Government thinking through its full effects-My hon. Friends have pointed out that it taxes the family-controlled business. There is nothing for a contract negotiated at arm's length for somebody to run a family business whereby one gives a person some shares. The Government bludgeon everybody. They try to take action and they do not realise that they are knocking everybody down.

The Chief Secretary said that the £3,500 minimum was not the last word. I thought that he was about to say, as the Government have said so often, "Between now and Report we shall think about it". Unfortunately he said, "From time to time we shall think about it" and it will probably next be thought about when the next Budget is introduced by a Conservative Government.

The Chief Secretary's reply has been disappointing. Nobody argues that it should be 25 per cent. instead of 15 per cent. or £5,000 instead of £3,500. What we have to make clear to the Government is that as the Bill stands the minima and maxima are incorrect. Because of the disappointing reply, I ask my right hon. and hon. Friends to divide on the Amendment.

Question put, That "fifteen" stand part of the Clause:—

The Committee divided: Ayes 145, Noes 134.

Division No. 184.]
AYES
[10.45 a.m.


Allaun, Frank (Salford, E.)
Coleman, Donald
Fletcher, Sir Eric (Islington, E.)


Alldritt, Walter
Conlan, Bernard
Fletcher, Raymond (Ilkeston)


Allen, Scholefield (Crewe)
Corbet, Mrs. Freda
Floud, Bernard


Armstrong, Ernest
Crawshaw, Richard
Foley, Maurice


Atkinson, Norman
Crosland, Rt. Hn. Anthony
Foot, Michael (Ebbw Vale)


Baxter, William
Cullen, Mrs. Alice
Freeson, Reginald


Bence, Cyril
Dalyell, Tam
Garrett, W. E.


Benn, Rt. Hn. Anthony Wedgwood
Davies, G. Elfed (Rhondda, E.)
Garrow, A.


Bennett, J. (Glasgow, Bridgeton)
Davies, Ifor (Gower)
George, Lady Megan Lloyd


Binns, John
Dell, Edmund
Gregory, Arnold


Bishop, E. S.
Diamond, John
Grey, Charles


Blenkinsop, Arthur
Doig, Peter
Griffiths, Will (M'chester, Exchange)


Boston, T. G.
Driberg, Tom
Hamilton, James (Bothwell)


Bradley, Tom
Duffy, Dr. A. E. P.
Hamilton, William (West Fife)


Bray, Dr. Jeremy
Dunn, James A.
Hamling, William (Woolwich, W.)


Brown, Hugh D. (Glasgow, Provan)
Dunnett, Jack
Hannan, William


Brown, R. W. (Shoreditch amp; Fbury)
Edelman, Maurice
Harper, Joseph


Buchanan, Richard
Edwards, Robert (Bilston)
Hattersley, Roy


Butler, Herbert (Hackney, C.)
English, Michael
Hazell, Bert


Butler, Mrs. Joyce (Wood Green)
Evans, Albert (Islington, S.W.)
Heffer, Eric S.


Carmichael, Neil
Fitch, Alan (Wigan)
Herbison, Rt. Hn. Margaret




Hobden, Dennis (Brighton, K'town)
Mahon, Simon (Bootle)
Sheldon, Robert


Horner, John
Manual, Archie
Shore, Peter (Stepney)


Howie, W.
Mapp, Charles
Short, Rt. Hn. E. (N'c'tle-on-Tyne, C.)


Hughes, Emrys (S. Ayrshire)
Mason, Roy
Silkin, John (Deptford)


Irving, Sydney (Dartford)
Maxwell, Robert
Silverman, Julius (Aston)


Jeger, Mrs. Lena (H'b'namp;St. P'cras, S.)
Mayhew, Christopher
Skeffington, Arthur


Jenkins, Hugh (Putney)
Mellish, Robert
Slater, Mrs. Harriet (Stoke, N.)


Johnson, Carol (Lewisham, S.)
Mendelson, J. J.
Small, William


Johnson, James (K'ston-on-Hull, W.)
Miller, Dr. M. S.
Snow, Julian


Jones, J. Idwal (Wrexham)
Molloy, William
Steele, Thomas (Dunbartonshire, W.)


Jones, T. W. (Merioneth)
Monslow, Walter
Strauss, Rt. Hn. G. R. (Vauxhall)


Kelley, Richard
Morris, Alfred (Wythenshawe)
Thomson, George (Dundee, E.)


Kerr, Mrs. Anne (R'ter amp; Chatham)
Mulley, Rt. Hn. Frederick (SheffieldPk)
Tuck, Raphael


Lawson, George
Murray, Albert
Varley, Eric G.


Ledger, Ron
Norwood, Christopher
Wainwright, Edwin


Lee, Rt. Hn. Frederick (Newton)
O'Malley, Brian
Walden, Brian (All Saints)


Lever, Harold (Cheetham)
Oram, Albert E. (E. Ham, S.)
Wallace, George


Lipton, Marcus
Orbach, Maurice
Watkins, Tudor


Loughlin, Charles
Palmer, Arthur
Whitlock, William


Mabon, Dr. J. Dickson
Pannell, Rt. Hn. Charles
Wilkins, W. A.


McBride, Neil
Parkin, B. T.
Williams, Mrs. Shirley (Hitchin)


MacColl, James
Pentland, Norman
Woodburn, Rt. Hn. A.


MacDermot, Niall
Prentice, R. E.
Woof, Robert


McGuire, Michael
Pursey, Cmdr. Harry
Wyatt, Woodrow


Mackenzie, Gregor (Rutherglen)
Rees, Merlyn
Yates, Victor (Ladywood)


Mackie, John (Enfield, E.)
Reynolds, G. W.
Zilliacus, K.


MacMillan, Malcolm
Robertson, John (Paisley)



Mahon, Peter (Preston, S.)
Rogers, George (Kensington, N.)
TELLERS FOR THE NOES:




Mr. McCann and Mr. Gourlay.




NOES


Agnew, Commander Sir Peter
Glover, Sir Douglas
More, Jasper


Alison, Michael (Barkston Ash)
Glyn, Sir Richard
Morrison, Charles (Devizes)


Allan, Robert (Paddington, S.)
Goodhew, Victor
Munro-Lucas-Tooth, Sir Hugh


Allason, James (Hemel Hempstead)
Grant, Anthony
Murton, Oscar


Anstruther-Gray, Rt. Hn. Sir W.
Grant-Ferris, R.
Neave, Airey


Awdry, Daniel
Gresham Cooke, R.
Noble, Rt. Hn. Michael


Baker, W. H. K.
Griffiths, Peter (Smethwick)
Onslow, Cranley


Barber, Rt. Hn. Anthony
Hall, John (Wycombe)
Osborn, John (Hallam)


Barlow, Sir John
Hall-Davis, A. G. F.
Page, R. Graham (Crosby)


Batsford, Brian
Hastings, Stephen
Peel, John


Berry, Hn. Anthony
Hawkins, Paul
Percival, Ian


Bessell, Peter
Heald, Rt. Hn. Sir Lionel
Peyton, John


Bingham, R. M.
Heath, Rt. Hn. Edward
Pike, Miss Mervyn


Birch, Rt. Hn. Nigel
Hendry, Forbes
Pounder, Rafton


Blaker, Peter
Higgins, Terence L.
Powell, Rt. Hn. J. Enoch


Boston, T. G.
Hirst, Geoffrey
Price, David (Eastleigh)


Box, Donald
Hobson, Rt. Hn. Sir John
Prior, J. M. L.


Boyd-Carpenter, Rt. Hn. J.
Hordern, Peter
Pym, Francis


Boyle, Rt. Hn. Sir Edward
Hornby, Richard
Redmayne, Rt. Hn. Sir Martin


Brinton, Sir Tatton
Hunt, John (Bromley)
Ridley, Hn. Nicholas


Brown, Sir Edward (Bath)
Jenkin, Patrick (Woodford)
Ridsdale, Julian


Bruce-Gardyne, J.
Johnston, Russell (Inverness)
Roots, William


Buxton, Ronald
Kerby, Capt. Henry
Scott-Hopkins, James


Carlisle, Mark
Kerr, Sir Hamilton (Cambridge)
Sharples, Richard


Carr, Rt. Hn. Robert
Kershaw, Anthony
Sinclair, Sir George


Channon, H. P. G.
King, Evelyn (Dorset, S.)
Smith, Dudley (Br'ntf'd amp; Chiswick)


Chataway, Christopher
Kirk, Peter
Steel, David (Roxburgh)


Chichester-Clark, R.
Lancaster, Col. C. G.
Studholme, Sir Henry


Clark, William (Nottingham, S.)
Langford-Holt, Sir John
Summers, Sir Spencer


Cordle, John
Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)
Talbot, John E.


Corfield, F. V.
Longbottom, Charles
Taylor, Edward M. (G'gow, Cathcart)


Crawley, Aidan
Longden, Gilbert
Taylor, Frank (Moss Side)


Dalkeith, Earl of
Lubbock, Eric
Turton, Rt. Hn. R. H.


Davies, Dr. Wyndham (Perry Barr)
MacArthur, Ian
van Straubenzee, W. R.


Dean, Paul
Mackenzie, Alasdair (Rossamp;Crom'ty)
Walder, David (High Peak)


Deedes, Rt. Hn. W. F.
Mackie, George Y. (C'ness amp; S'land)
Walker, Peter (Worcester)


Eden, Sir John
Maclean, Sir Fitzroy
Ward, Dame Irene


Emery, Peter
Macleod, Rt. Hn. Iain
Webster, David


Errington, Sir Eric
Marples, Rt. Hn. Ernest
Whitelaw, William


Eyre, Reginald
Mathew, Robert
Wilson, Geoffrey (Truro)


Fell, Anthony
Maude, Angus
Wise, A. R.


Fletcher-Cooke, Charles (Darwen)
Mawby, Ray
Yates, William (The Wrekin)


Fraser, Rt. Hn. Hugh (S'fford amp; Stone)
Maxwell-Hyslop, R. J.
Younger, Hn. George


Fraser, Ian (Plymouth, Sutton)
Maydon, Lt.-Cmdr. S. L. C.



Gilmour, Ian (Norfolk, Central)
Mitchell, David
TELLERS FOR THE NOES:


Gilmour, Sir John (East Fife)
Monro, Hector
Mr. McLaren and Mr. R. W. Elliott.

Mr. Richard Sharples: On a point of order, Sir Samuel. Owing to the difficulties in which the

Committe has got itself because the Government are trying to press their business through unreasonably, I ask your advice.


The authorities of the House are unable to provide reporters for Standing Committees meeting upstairs and I should be grateful if you would let us know whether or not it is possible for the Committees upstairs to meet under these conditions?

The Deputy-Chairman (Sir Samuel Storey): The meeting of Committees upstairs is not a matter for this Committee. It is a matter that should be raised in the Committees upstairs. On the other hand, if it is a question of services to the House, that is a matter which should be raised with Mr. Speaker at a later time.

Sir John Eden: Further to that point of order.

The Deputy-Chairman: Order. I have already ruled that it is not a point of order for this Committee.

Sir J. Eden: On a point of order. Is it not a fact that the proceedings from the point of view of this Committee are still Wednesday's business and that, as far as we are concerned, what pertains to Wednesday's business still continues to do so?

The Deputy-Chairman: I do not see what point of order arises there.

Amendment made: In page 90, line 26, leave out from "months" to end of line and insert "each of the".—[Mr. Diamond.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Patrick Jenkin: I do not believe that we should leave this Clause without putting on record what appears to me to be the underlying rationale, the logic, that lies behind the reason for having limitations of this sort on directors' remuneration. It arises out of the anomalous position—and I do not use that word in any pejorative sense—the hybrid position, of a working proprietor.
The working proprietor in business derives his income partly from his personal exertions—that is the phrase used in the Australian Income Tax Act—and partly as a return on the capital that he has invested in the business. The purpose of the Clause as it was and as we have it now is to try roughly to ensure that the remuneration which comes to the work-

ing proprietor as a reward for his personal exertion comes to him, to put it broadly, in the form of Schedule E emoluments while the reward for the investment of his capital is given to him in the form of distributions from the company.
This would seem to me to be a perfectly proper feature for a taxation system such as this is. I cannot agree with the view expressed by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and one or two other hon. Members that there should be no place at all in the scheme for limitations on working proprietors' salaries. The one thing on which I agree with the hon. Member for Buckingham (Mr. Maxwell) is when he spoke of the question of earned income reliefs. That is a very important point.
It will inevitably happen that it is very difficult to distinguish, to draw the line, between what is proper remuneration under Schedule E and what is return on the capital invested in the business. The point I wish to make is that it is so important that those who run these businesses should be given every possible encouragement to devote the maximum energy and enterprise to their work because, on the whole, the figures should tend to err on the high side; that, on the whole, the limits should be generous limits and not penal limits—

11.0 a.m.

The Chairman: Order. The hon. Gentleman is not to discuss Amendments we have already disposed of.

Mr. Jenkin: I will not mention a single figure. I am talking about the principles of the Clause as it now stands. In this regard I would say that it is probably wrong and could be misleading to try to compare the salary paid to working proprietors in those companies with the rewards paid to salaried employees in large public companies and in other walks of life. The two are simply not comparable. This was very clearly brought out in a survey conducted by the Department of Applied Economics at Cambridge a couple of years ago. It was commissioned by the Cambridge Appointments Board which wanted to find out what had been the careers and the incomes of men and women who had graduated from Cambridge University 10 years previously. The survey revealed


that the class of graduate who arrived at the highest income levels was the working proprietor in family businesses. This is right, because not only do they have the responsibility of performing their duties as directors, technical advisers and managers but they also carry inevitably the risk of the responsibility for the overall direction of the business.
The combination of these factors leads to a justification for a higher reward for working in what otherwise might appear to the casual observer to be somewhat comparable work. It is for this reason that I hope the Government will, as the Chief Secretary has said, bear these figures in mind and will not cheesepare and treat this as a penal provision.
The whole of this section on close companies is anti-avoidance and, provided the whole idea of anti-avoidance is adhered to, the fact that, at the margin, salaries recommended to be paid to working proprietors may be somewhat on the high side, seems to be no disadvantage at all. I hope that the Government and the Inland Revenue, when considering these matters, will take this view and not adopt a penal attitude.

Mr. George Y. Mackie: I and my hon. Friends have been considering the effect of the Clause on enterprise—and the small close company is the start of enterprise in this country. Judging from the anomalies that have arisen it appears to me that the Clause does nothing to encourage enterprise and in fact hits directly at the man starting a business, who because of regulations cannot pay himself anything like the sort of salary he could earn working for someone else. For this reason we must oppose.

Mr. Barber: We all recognise from the debates we have already had that the principal purpose of this Clause is to prevent avoidance of tax and so far as its terms as they now stand are necessary to do this I think that there would be very few Members who would oppose the Clause. While I certainly would not wish to bind myself to any particular figures I think that if we consider the Clause as it now stands that the Chancellor of the Exchequer has failed to understand the consequences of what he is doing.
One simply cannot compare, as has been done in the course of this debate the position of the existing Surtax companies, the Section 245 companies, and the close companies on which this Clause now bites because the definition of a close company is far enlarged and far wider than the definition of the old Surtax company. Many of the companies which are covered by this Clause, and on which this Clause will operate, are in our growth industries and are the very lifeblood of our economy.
Yet here is the Chancellor of the Exchequer penalising the very people on whom these companies depend. There can certainly be no doubt from what we have heard in the course of these debates that it is the smaller business which is hard hit by the terms of this Clause. Who are the people that the Chancellor seeks to penalise by this Clause? I make no apology for saying, once again, that they are, in the words of the subsection,
… directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity …
What will be the result if a company in its best interests finds that it must pay remuneration in excess of the limits laid down in this Clause? The answer is that in many cases the marginal rate on the excess remuneration will be more than 20s. in the £. I realise we have been talking in terms of £4,000 and £5,000 a year. To take a case which is not unreasonable in certain circumstances, of a highly-paid individual operating in a managerial or technical capacity and who if his remuneration is about £8,000 a year would pay Income Tax and Surtax in the region of 12s. or more in the £ and Corporation Tax at 8s. in the £, a total of 20s. in the £ by way of taxation.
Of course, the consequence of all this is that in future many individual proprietors of businesses, building up their businesses and considering incorporation, will hesitate to incorporate their businesses. One is bound to ask, Is this what the Chancellor wants? I do not think that it is what he wants, but the reason it will happen is simple. It is because they will realise that the allowable remuneration is inadequate and, therefore, they will tend to stay as they are without seeking to incorporate, and that, I would have thought, would be a bad thing for the economy.
We have considered a number of Amendments, and I think that at this hour of the morning, when we still have more work to do, it would not be appropriate to divide the Committee again now. I can only say that I think that it may be appropriate to return to this on Report.

Sir Rolf Dudley Williams: I do not want to detain the Committee for more than a few minutes, but I think that the result of having this Clause in the Bill will be tremendous wangles to avoid the restrictions on companies. I have no doubt myself that those parts of the Clause which seek to restrict this evasion of taxation can be got round by any skilful lawyer. Already, I have been told of one way in which this will be done; and that is hardly a sign of a good Finance Bill, and nor is it the Chancellor's policy. I thought that it was the Chancellor's policy to simplify—[Interruption.] I do not want to delay the Committee unduly, but if any hon. Member wants to intervene I am always prepared to give way. If the Parliamentary Private Secretary to the Prime Minister wants to say something perhaps he will get up instead of talking from a sedentary position.

Mr. Ron Ledger: The hon. Member has a lot more energy than some of us who have been here all night. It is the first time we have seen him during this sitting.

Sir Rolf Dudley Williams: That just shows how sleepy the hon. Member has been.

The Chairman: Order. We have quite enough to discuss in the Bill, without discussing the relative attendances of individual Members.

Sir Rolf Dudley Williams: I should think that the hon. Member ought to be rather glad that I have been here, otherwise I may have been inveigled into making a number of interruptions.
But that is what will happen—a tremendous lot of work by lawyers, because in simplifying the tax and the fiscal system all that the Chancellor has done is to make all this more complicated and an absolute harvest for anyone engaged in these sorts of avoidance of taxation. So I hope that on Report this sort of

practice will be taken into account again by the Chancellor, when, perhaps, he could give these unfortunate people some relief.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 70.—(ASSESSMENT OF CLOSE COMPANIES TO INCOME TAX IN RESPECT OF CERTAIN LOANS.)

11.15 a.m.

Mr. Diamond: I beg to move Amendment No. 699, in page 91, line 22, at the end to insert:
(and if it is due from him as personal representative within the meaning of Part XIX of the Income Tax Act 1952, the amount treated as received by him shall accordingly be, as regards surtax, included for purposes of the said Part XIX in the aggregate income of the estate)".
The purpose of this Amendment is to ensure that if a close company makes a loan to a participator who repays it after his death—which is a practice which does exist—while the estate is still under administration the grossed up equivalent of the amount will be treated for Surtax purposes as income of the estate, and attract Surtax as may be appropriate. The only relative part of the Amendment is that this applies while the estate is still under administration. The Clause already takes care of the situation in other circumstances, but not this particular circumstance, and the purpose of the Amendment is to stop up an opportunity which would otherwise have been an opportunity of avoidance. I hope that the Committee will feel disposed to accept the Amendment.

Mr. Geoffrey Lloyd: May I ask the Chief Secretary for a little elucidation? I wanted to raise a question, but it seems to me that it is possible that his Amendment deals with it. It is a question of allowing, so to speak, outside the mischief of this Clause, a certain type of loan. It is exactly this type of loan to a participator in the company where all the family's funds are so much locked up in small funds there is really no other source of funds to pay the death duties.

Mr. Diamond: The right hon. Gentleman is raising a very real problem, but it is not the problem of this Amendment.

Mr. Geoffrey Lloyd: I will raise it on the Question, That the Clause stand part of the Bill.

Mr. Diamond: The Amendment does not deal with that circumstance.

Amendment agreed to.

Mr. Diamond: I beg to move, Amendment No. 700, in page 91, line 29, at the beginning to insert "Subsection (3) of".
It may be convenient, also to take Amendment No. 705 now.

The Chairman: We could take Amendment No. 701 with Amendment No. 700.

Mr. Diamond: I am obliged, Dr. King. My papers were not quite in order.
This and the other Amendment that we can discuss with it are to improve the drafting of subsection (5), which seeks to prevent a double charge of tax where a loan by a close company to a participator would be caught both by this Clause and by Section 408 of the Income Tax Act, 1952. Under that Section, avoidance by means of a settlement combined with a loan to the settlor is dealt with, and it would be wrong if by any mischance that avoidance Section 408 had the same effect, or rather duplicated the effect, of this Clause.
Therefore, this Amendment corrects that situation, and at the same time corrects a flaw whereby relief would be given for Income Tax as well as Surtax although it is only Surtax which would otherwise be payable twice on the same income. I hope that that is a sufficient explanation.

Amendment agreed to.

Further Amendment made: In page 91 line 33, leave out from beginning to end of line 37 and insert:
release or written off exceeds the sums previously falling to be so included (without the addition for income tax provided for by section 408 (4)); and where any amount is included in a person's income by virtue of subsection (3) above in respect of any loan or advance, there shall be a corresponding reduction in the amount (if any) afterwards falling to be so included in respect of it by virtue of the said section 408."—[Mr. Diamond.]

The Chairman: With Amendment No. 702 we can also take Amendment No. 703, in page 91, line 43, to leave out "some other person" and insert:
some person other than the close company

and Amendment No. 705, in page 92, to leave out lines 7 and 8 and insert:
loan or advance had been made to him.
(7) In subsections (1) and (6) (b) above the references to an individual shall apply also to a company receiving the loan or advance in a fiduciary or representative capacity and to a company not resident in the United Kingdom.

Mr. Diamond: I beg to move Amendment No. 702, in page 91, line 40, to leave out "individual" and to insert "person".
The effect of this Amendment and of Amendment No. 705 is to deal with the case where a close company makes a loan to a participator, but does not do so directly. This is where we deal with avoidance by one remove, by making a loan to an intermediary equivalent to a payment to a participator. As the Clause is drafted it applies only to the intermediary as an individual. That is not sufficient, because an intermediary could be a company.
Therefore, again, one wants to bridge a gap, in which there could be avoidance by payment being made to an individual. By the intermediary, either an individual or a company, being caught we have filled the gap, which I think the Committee wishes to fill.

Mr. Barber: There is one point that I should like to raise on subsection (6) with which these Amendments are concerned. It may be that the Chief Secretary will not wish to commit himself this morning on what I say, but perhaps he will consider it.
I appreciate that the purpose of the Clause is to prevent the avoidance of taxation, but it seems to me that subsection (6) as the right hon. Gentleman has amended it will cover the case where a close company makes a loan to a person who is not a participator in accordance with paragraph (a) as amended, and where a person other than the close company makes a payment to an individual who is a participator under paragraph (b) as amended. It seems to me that these two transactions might well be quite disconnected, that each individual or person has no knowledge whatever of what is being done by the other, and there is no intention to avoid tax.
That conclusion is possible because the opening words of subsection (6) are.
Where under arrangements made by any person …
As, on the normal canons of interpretation, the singular includes the plural, the arrangement could be made by two persons. It therefore seems likely that the Clause could cover a case which was really quite innocent, and I was wondering whether what was required was the insertion of some such words as "acting in concert", such as appear in Schedule 10 in another context.
It may be said that it will be difficult for the Revenue to prove that people are acting in concert, but in this case I would not object if the onus was put on the individual. The right hon. Gentleman may not have the answer now, and I shall understand if he wants to consider what I have said.

Mr. van Straubenzee: In contrast to what my right hon. Friend has said, and as we are coming towards the end of our labours and the Chief Secretary has maintained his equilibrium remarkably well throughout the long night and morning, perhaps he will allow me a gentle leg-pull. If he looks at subsection (6,a), he will see that in its amended form it will read:
a close company makes a loan or advance to an person …
The right hon. Gentleman will realise that this is a very serious defect in the Bill. If he gives a firm undertaking to deal with the matter, I shall not call on my hon. Friends to divide against the Amendment.

Mr. Maxwell-Hyslop: I would be grateful if the right hon. Gentleman could clear up one doubt in my mind. Will these provisions cover the case where a close company deposits money with an insurance company—this is something which companies often do—and a director of that company, quite independently, borrows money against the security of an insurance policy from that insurance company? This is something which individuals often do if they want to raise money, particularly if a credit squeeze is in operation. They borrow on their policies from the company with which they have the policy. These two events may be dissociated, but would they neverthe-

less be brought within the provisions of this subsection?

Mr. Diamond: I do not think that there is any problem there. Subsection (6) refers to arrangements made
otherwise than in the ordinary course of a business …
If it is in the ordinary course of business, it is excluded immediately, and I do not think that there is a problem there.
I am concerned about what was said by the hon. Member for Wokingham (Mr. van Straubenzee), and I recognise the great generosity with which he has brought the matter to my attention. I can only say that I am grateful to him beyond description.
I answer the right hon. Member for Altrincham and Sale (Mr. Barber) with some trepidation. I am informed that notwithstanding the right hon. Gentleman's great legal knowledge, "any person" cannot be the plural, and can only be the singular. If it can only be the singular, his problem is at an end. I am informed by the draftsman that that is the case.

Amendment agreed to.

Further Amendment made: In page 91, line 43, to leave out "some other person" and insert:
some person other than the close company".—[Mr. Diamond.]

Mr. Diamond: I beg to move Amendment No. 704, in page 92, line 6, to leave out "that" and to insert "the grossed up equivalent".
The purpose of the Amendment is to correct a drafting error. It was intended to put in these words, and the purpose of the Amendment is to put the matter right.

Amendment agreed to.

Further Amendment made: In page 92, leave out lines 7 and 8 and insert:
loan or advance had been made to him.
(7) In subsections (1) and (6)(b) above the references to an individual shall apply also to a company receiving the loan or advance in a fiduciary or representative capacity and to a company not resident in the United Kingdom".—[Mr. Diamond.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Mr. Geoffrey Lloyd: I can be brief, because the right hon. Gentleman was


kind enough to grasp the point that I was ma king in the course of correcting me when I tried to intervene on an inapplicable Amendment.
The point that I wish to raise concerns the loan to a participator when it is for the purpose of paying death duties to keep the family business together. I understand that this practice is permissible under the present law, and I would be grateful if the right hon. Gentleman could say whether it will still be allowed under the Clause.
I ask that because on my rather inexpert reading of it it appears that it will not be. If it will not be allowed, I should like the right hon. Gentleman to consider it as something which it might be wise to permit, subject, of course, to every safeguard, because we appreciate that the main purpose of the Clause is the prevention of abuse.

Mr. Diamond: I undertake to look ir to the matter. The right hon. Gentleman is not expecting any undertaking at the moment, but beyond that I shall consider the point carefully.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Clause 71 ordered to stand part of the Bil1.

Mr. Diamond: Dr. King, notwithstanding the fact that you may find this Motion most unacceptable, I beg to move,
That the Chairman do report Progress and ask leave to sit again.
I hope that you will forgive me for saying that one of the reasons why, on the whole, we have had a very happy debate and made great progress is that you have excelled even yourself in the way in which you and your deputies have presided over our gatherings. Those who have any experience of this sort of thing know that during the course of an all-night sitting human beings tend from time to time to be more or less human. We all recognise this, and we are, therefore, very grateful to you for the way in which you have enabled us to make progress.
My right hon. Friend would wish me to express to the Opposition our gratitude for the way in which they have moved

Amendments, many of which have improved the Bill, and we have been glad to accept them. On the whole, we have made good progress. It is now half-past eleven, and getting near the time at which we normally finish our business and start thinking about going to bed. I hope that the Motion will be acceptable to both sides of the Committee.

11.30 a.m.

Mr. Heath: I can well understand that the Chief Secretary wishes to move to report Progress; indeed, he is following the very proposal which was put forward by the Chancellor several hours ago. There are many reasons why this should be done, but before I mention some of them I want to join with him in the tribute that he has paid to you, Dr. King, and to your colleagues who have occupied the Chair, and to thank the right hon. Member for the kind remarks that he has made about Her Majesty's Opposition. The Committee has now been sitting for 19 hours 48 minutes. This is the longest sitting of a Committee in this Parliament, and is a marathon sitting by any modern standards.
We have been forced to do this by the Chancellor of the Exchequer and the Patronage Secretary. We have been forced to do it because the Government cannot provide time at a proper hour of the day to debate the Bill. The reason is that their whole programme in this Parliament is in a state of complete chaos. This is the longest and most complex Finance Bill for 50 years, and it is fantastically irresponsible to make Parliament discuss it in these circumstances. It is generally acknowledged, both inside and outside the House, to be a half-baked Bill—and to force this Committee to cook it through the afternoon, the evening, the night, and the following morning is most unsatisfactory.
Hon. Members opposite think that they have an argument for morning and afternoon sittings, and we believe that there is an argument for afternoon and evening sittings. What I fail to see is any argument for afternoon, evening, all-night and morning sittings consecutively. I hope that I carry the Committee with me in that.
I agree with the right hon. Member that we have made progress today. He was very complimentary about the progress that has been made. For one


awful moment I thought that he was about to say that we were "rounding the corner." That would have been rather ominous for the future work of the Committee. We have gone through about a dozen Clauses, and I am glad to know that the Chief Secretary is pleased at this. I agree that the Treasury Bench has been greatly helped by the mass of information which has been provided by hon. Members on both sides of the Committee, gained from a wealth of practical experience, and my own sincere wish is that the Chief Secretary and his colleagues should benefit from it.
We are half way through the Clauses which deal with the close companies, and whenever it may be announced this afternoon that we shall resume our business on the Bill we shall be faced with further important debates on close companies, in respect of the transitional provisions for Corporation Tax, and the new Clauses. We are looking forward to a resumption of our debates on these very important matters.
There is one other reason why we should report Progress. It will enable those hon. Members who wish to do so to raise with Mr. Speaker the position, of which the Committee is aware, which has caused chaos in two Committees upstairs, namely, the Committees considering the Race Relations Bill and the Registration of Births, Deaths and Marriages (Scotland) Bill, neither of which Committee can function properly because reporters are not available. This is the condition of Parliamentary business to which the Patronage Secretary has reduced Parliament. It may well be that if this Committee decides to accept the Chief Secretary's Motion the reporters could become available, or Mr. Speaker or Mr. Deputy-Speaker might be able to give a Ruling on the matter. At the moment, there is confusion and chaos, and the Committees will probably have to adjourn.
During this sitting hon. Members on this side of the Committee have been fighting long, fierce battles to protect British trade, visible and invisible, from the effects of the Corporation Tax and, having fought, we feel that there is now a good reason for reporting Progress. We have fought to protect the interests

of the Commonwealth and the developing countries, as well as British interests. We have been fighting for the interests of millions of savers in life insurance. We have been fighting for the interests of all the hundreds of thousands of people who invest in unit trusts and investment trusts. All this has been worth while, because we have helped to improve the Bill. Therefore, having fought this good fight, we look forward to resuming certain matters in connection with which undertakings have been given in respect of the Report stage.
You may have gathered, Dr. King, that I agree with the Chief Secretary, and support the Motion. We look at them, bemused and weary on the Treasury Bench—whereas in the Opposition we are buoyant and alive—and we send them off for the weekend to try to refresh themselves and face the battles which lie ahead.

Mr. George Y. Mackie: I, too, join in the congratulations which have been extended to the Chair on its conduct of our proceedings. I want to say something as a Liberal, speaking in my first Finance Bill. There is a great deal of club atmosphere and good humour about. All those who have sat up all night are rather proud of it. There is a great deal of gentle banter going on, but in my opinion we should be thoroughly ashamed of ourselves for conducting this important business right through the night. Before I catch the club atmosphere myself, I would point out that it is high time that the House reformed its method of doing business.

Question put and agreed to.

Committee report Progress; to sit again this day.

SCHOOLS, HAMPSHIRE

Motion made, and Question proposed, That this House do now adjourn.—[Mrs. Harriet Slater.]

11.37 a.m.

Mr. John Cordle: Having done a hard day's night, and at least having reached the Adjournment, I want to agree with my right hon. Friend that we on this side of the House still have plenty of buoyancy. In my opinion, better schools for Hampshire will have a more profound effect upon the future of this nation than


will the Government's half-baked Finance Bill, which will be both repealed and forgotten within the year.
Over the last 20 hours we have been discussing double taxation, Commonwealth trade, statutory water companies, local authorities, unit trusts, housing corporations, building societies, life assurances, and some of the close company Clauses.
I am determined to get in my word before the business of the House closes for Wednesday. The portion of Hampshire which it is my lot to represent is partially looked after by the Hampshire County Council—Christchurch—while the other part falls within the Borough Council of Bournemouth. The question of Hampshire schools—the subject of this debate—is not one which deals in any way with the academic life of the schools, but one which is primarily designed to bring to the notice of the Minister the serious difficulties and defects which handicap the Hampshire County Council schools, namely, the lack of adequate permanent new school buildings to meet the rapid growth of population in the county and, at the same time, to draw the attention of the House to the ever-growing problems of the uneconomic hutted classrooms which are still being erected, when the obvious need is for a non-temporary structure which will give all concerned continuing satisfaction.
Those who have seen our new schools in Hampshire will readily agree that they are outstanding in their appearance, as well as providing all the up-to-date facilities for educational life, both for the pupils and for the teachers. The furnishings are particularly attractive and great credit, in my view, is due to those concerned with this facet of decoration, giving the Hampshire modern schools a touch of tasteful decor little known in days gone by.
Hampshire has been blessed with a Chief Education Officer of the highest calibre, who is held in high esteem by those of us who have interested ourselves in education. I hope that his work and that of his excellent staff will be better helped by the early provision of more permanent buildings to facilitate the easier running of his Department. The council's concern about the inadequacy of the building programme continues to

be acute. It has now reached the stage at which it is felt that a breakdown will occur unless action is taken to increase the amount of new building to match the rapidly increasing population in Hampshire.
Hampshire is a developing county. In the last four years, the population has increased by 100,000. A planned development, including the town development schemes of Basingstoke and Andover, indicates that this rate of progress will continue. The numbers of children in the county are also increasing. While the 10-year-olds now number 11,000, there are 17,000 one-year-olds. It is quite certain, therefore, that the pressure on school accommodation of all kinds is bound to continue. Christchurch is exceptional in this respect, because of the character of its residential population. The Christchurch schools are not at this moment under any exceptional pressure of population.
Hampshire's major building programme for 1965–68 is about £5 million. Following representations to the Department of Education and Science, it is understood that a supplementary allocation of capital of approximately £570,000 is to be made for the last two years–1966 to 1968—of this programme. Nevertheless, even this substantial building programme is insufficient to meet the need of permanent accommodation in the Hampshire schools without having recourse to the expedient of temporary hutted accommodation. The authority's own assessment of its needs over the same period is £11 million, which is the cost of projects submitted to the Department for approval.
This is why recourse has to be had to the provision of temporary accommodation, by way of prefabricated hutted classrooms. In the last financial year, 67 classrooms, providing about 2,500 places, were erected at a cost of £96,500, either because no permanent provision could be made at the schools concerned or because stop-gap provision had to be made until permanent accommodation could be provided in a later building programme. In the present financial year, about 84 classrooms will need to be provided, to give over 3,000 places at a cost of £145,000. The number of places to be provided this year is exactly double that required five years ago, in the


financial year 1961–62. Today, there are 16,600 primary school children in 415 temporary classrooms and 10,260 secondary pupils in 426 temporary classrooms or, in all, 26,860 pupils out of a school population of 127,202. That is to say, about 21 per cent. of all pupils in Hampshire schools are accommodated in temporary classrooms.
It is self-evident that the stop-gap provision of temporary classrooms is not an economic way of providing school places, but there are also educational considerations, which I hope that the Minister of State will take fully into account. In all schools, the provision of temporary accommodation of this kind places a burden on the communal provision, such as that of kitchens, dining rooms, halls and staff rooms, as well as on cloakroom and sanitary accommodation. In many schools, where there is a disproportionate number of temporary places, this burden becomes intolerable for staff and pupils. In secondary schools particularly, there are other educational disadvantages arising from the lack of parallel provision of practical rooms, because it is normally uneconomic to provide them in temporary constructions.
Therefore, at some schools, advanced courses for pupils over statutory school age have to be restricted. At other schools, where such courses are fostered despite the pressure on accommodation, it is inevitable that this is done at the expense of the rest of the school. At least it can be said that, if additional permanent practical accommodation could be provided, the number, variety and size of the advanced courses would increase considerably.
The provision of temporary accommodation is by way of the minor works programme. In the last financial year, Hampshire spent £385,000 on minor works with a cost limit of up to £20,000 each. Of this sum, Hampshire County Council approved £165,000 on projects under £2,000 and the Department of Education and Science £220,000 on projects over £2,000. The ability of authorities to spend on projects under £2,000 without limit and without reference to the Department was withdrawn by the Government at the beginning of this financial year. The result was that, whereas Hampshire had approved £250,000 on the small minor

works to be carried out this year and had expected that the total sum on minor works would be about £470,000—assuming that the Department gave the same allocation as in the previous year—in fact, the allocation by the Department for all minor works in the present financial year of £360,000 is £110,000 less than expected and £25,000 less than the actual expenditure last year.
It will be seen that an expenditure on temporary classrooms alone in this financial year is expected to be £145,000, which is quite disproportionate to the total allocation. From its own allocation for works under £2,000, Hampshire last year embarked upon a five-year programme to alleviate deficiencies in school premises which had been highlighted by the Ministry's 1962 Building Survey of Schools. At the beginning of last year, of all the 384 county and controlled primary schools in Hampshire, 32 were still without a source of hot water to pupils' cloakrooms and it was intended to make good this deficiency in two years.
There were 196 schools where the sanitation was mainly out of doors and it was planned to provide some internal sanitation for pupils and staff over a five-year programme. A total of 101 schools remained without any form of central heating and again it was proposed to remedy this deficiency in the smaller schools over five years. In the same period, it was hoped to provide staff rooms in 99 schools which had no accommodation for staff at all. These schools are village schools where, because of the nature of these deficiencies, the opportunity for improving them does not arise indirectly because of the provision of additional permanent accommodation following on increased numbers.
The figures show for themselves that the village schools have been neglected more than those of the towns. It is, therefore, the more regrettable that, whereas the county council authorised expenditure of £106,000 in the last financial year from its own minor works programme for making good these deficiencies at 96 schools as part of a planned programme over a number of years, they are obliged in this financial year to reduce expenditure on their village schools to about half. I hope that the Minister will take that very much into account in his reply.
In short, Hampshire expects this year to receive an addition to its school roll of 5,000 pupils, of whom 3,000 will be due to the increase in the birth rate and 2,000 to immigration from London and other parts of the country. Coincidentally, it will be necessary to place 3,000 children in temporary hutted accommodation this year, and the remaining 2,000 will need to be taken into schools, many of which lack the civilised amenities to which I have referred. In either event, conditions are unsatisfactory for pupils in Hampshire schools, and the number of children housed in hutted accommodation is steadily increasing.
The position as I have described it gives rise to very serious thought. If the problem remains untackled, the position will deteriorate still further. I earnestly hope that the Minister will give it his immediate attention and provide a favourable reply to what is a most urgent matter affecting many thousands of children in Hampshire.

11.51 a.m.

Mr. David Mitchell: I want to intervene only very briefly in this debate because we are all anxious to hear the Minister's reply. My hon. Friend the Member for Bournemouth, East and Christchurch (Mr. Cordle) has sketched in for us the very serious state o' affairs that is beginning to develop in the county. As Member for Basingstoke, a division that takes in the towns or Basingstoke and Andover, both of which are taking a large number of overspill people from the London area, I can say that we are very concerned, not only about the immediate position, but more particularly about the longer-term plan.
One of the factors in the expanded town development in this area is that the number of school children, and the birth rate, are both very much higher than the planners originally expected. We have in Hampshire a natural increase of 1,000 a year and we have immigration into the county of 4,000 a year. With that sort of background, it is very disturbing to hear that only half the programme needed for 1967–68 has been approved by the Minister, and that the major-minor improvements have been slashed from £110,000 to only £60,000
Such savage cuts can only damage the educational programme, and I hope that

the Minister will restore them, and considerably increase the allocation next year. If the school-leaving age is to be raised in 1970, 7,000 new places will be needed in Hampshire, and that means 10 new secondary schools. What does the Minister intend to do? It is no use his waiting until 1970 before making up his mind to allocate the money for the necessary buildings.

11.53 a.m.

The Minister of State, Department of Education and Science (Mr. R. E. Prentice): I sometimes think that a special medal should be awarded to those who speak in Adjournment debates after an all-night sitting such as this and, indeed, to you, Sir, for occupying the Chair at this hour.
The hon. Member for Bournemouth, East and Christchurch (Mr. Cordle) has raised very clearly and fairly a matter of great seriousness to this county, and he was supported by the hon. Member for Basingstoke (Mr. Mitchell). The only difference I have with them is that the hon. Member for Basingstoke said that a serious situation is beginning to arise. The serious situation has existed for many years, and has been getting worse for many years. It is the fact that for a very long time this country has failed to invest in education, and in educational building, in particular, the resources needed to keep abreast with growing problems and to improve a bad situation.
If I wanted to make party points, I would remind hon. Members that it was their party that was in power during the crucial years when the problem was neglected. The school building survey—which was produced under the former Government, but which they chose not to publish and which we have since published—showed a state of school building throughout the country which meant that, stated in terms of 1963 prices, over £1,300 million needed to be spent to bring our schools up to a reasonable standard.
Therefore, when the hon. Member for Bournemouth, East and Christchurch says, as he is entitled to say, that he is concerned about schools in Hampshire that have outside toilets, no hot water supply, no school hall, no staff room, and so on, I can only say with regret that these conditions exist throughout the country, and that the backlog of work is tremendous. It would be a tremendous


backlog of work even if the school population remained static, but it is growing rapidly. As the hon. Member said, the previous forecasts were wrong. We have more than 7 million children in the schools now and we look forward to having more than 9½ million in 10 years time. Therefore, a tremendous increase in investment is needed to enable us to stay in the same place, let alone improve the bad conditions in so many schools.
In Hampshire, the position is worse than average in that the population is growing more quickly than average. It has doubled since the end of the war. It was 63,979 in 1947, the present figure is 127,638, and it rises by over 4,000 a year. The hon. Gentleman said that it increased by 5,000 each year. That is the order of increase that is to be expected, not only from the natural increase occurring everywhere, but from the growth of the commuter areas, the growth of the L.C.C. overspill areas at Andover and Basingstoke, the rapid growth of the suburbs of Southampton and Portsmouth across the borough boundaries, and many other factors. This is a situation similar to that faced in counties like Buckinghamshire, Berkshire, Hertfordshire and others, and it means that those counties, including Hampshire, have been getting rather a larger share of scarce resources for school building than most other counties and county boroughs in the country.
That has the fortunate result—and I say this in no way to diminish the seriousness of the situation—that a larger proportion of children in Hampshire get their schooling in modern post-war buildings than is the case in the country as a whole. If one compares the situation of Hampshire children with that of children in many northern counties, one finds a very much larger proportion of Hampshire children are in modern schools, with all the benefits that provides.
On the other hand, it makes even more frustrating the contrast between those new schools and the old schools and village schools that the hon. Gentleman mentioned. It also means that so much of the resources in Hampshire have to go to the provision of new "roofs over heads" that only a trickle is left for improvements. It also means that a large number of children are in the temporary classrooms to which reference has been

made. I believe that about 800 temporary classrooms are at present in use in the county.
I am glad to say that we have recently been able to approve an increase in the allocations made by the former Government for the period between now and 1968. The hon. Member said that he understood that an increase had been made, and that is true. The information was conveyed to the county some weeks ago, and the official letter giving the details was sent out on 11th June.
The increase will add to the 1966–67 programme five primary school projects in Farnborough, Havant, New Alnesford, Totton and Yateley amounting to a total value of £331,262, and will add to the 1967–68 programme a major extension to the Wakeford County Secondary School valued at £221,559. The county will thus have had allocated in the current year, a sum of £1,790,000, and next year, £2,375,000. For 1967–68 only part of the allocation has been made so far—perhaps half—but we say that even if the total allocation remains the same as for these two coming years the county has so far had an allocation of £1,620,000.
The hon. Member said, as he was entitled to say, that this is only a fraction of the bids put in by the county authorities of what they consider is needed. This, of course, is, unhappily, a common feature of what is happening everywhere and of what has happened everywhere for several years. The bids put in to the Department, or formerly to the Ministry of Education, by the local education authorities over a number of years have been allowed only to the extent of about one-third of what the authorities have asked for. This is a state of affairs which the nation should try to improve. It is not fair, however, to talk in terms of cuts, because "cuts" is not an accurate description of the difference between what a county would like to do in a year and what the Department is able to grant.
Most of these sums will, of necessity, be devoted to providing new places for the child population, but some of the work will amount to replacements. Of the primary school projects in this period, three will involve the replacement of old schools by new buildings, which represents a minor measure of improvement


to an unsatisfactory situation, although it is far too little in relation to the need. That is the position everywhere, but, at least, it is some improvement.
As to minor works, the allocation is made every year and for the current year the county has been allocated £360,000. That is a good deal larger than the allocation for last year. I realise that that is not the whole story, but last year's allocation was only £220,000. As the House will know, the Government had this year to decide, while they were increasing the minor works programme, which they increased over the country as a whole from £18 million to £21 million, to bring under stricter control and to include within the allocation for each authority all the minor works including the very small ones, the under-£2,000 jobs, which previously had been off ration.
As I have had to explain at greater length in other debates, however, although those small works were off-ration locally, they were not off-ration nationally. The Department had to make allowance for them before it could make the allocations to authorities. Because enterprising authorities such as Hampshire were making such a large use of this what might be called mini-minor concession, the whole national programme was becoming distorted. More was being spent on jobs of under £2,000 than on those between £2,000 and £20,000. The only sensible thing to do was to bring the situation under a more efficient system of control, but I am glad to say that in doing this we were able to increase the total minor works allocation for the country.
That meant that certain authorities like Hampshire, if one considers what they were spending on mini-minor works, will spend rather less this year but that other authorities will spend more. It is natural that those spending less will protest about the change. Nevertheless, it was the only thing to be done in this situation. I have explained this and found it acceptable in general terms to the County Councils Association, the A.E.C. and other bodies.

Rear-Admiral Morgan Giles: An aspect of these minor works which I should like to underline, and

on which I should like to know whether the hon. Gentleman agrees with me, is that these minor works do something to relieve the frustration of the teachers and staff of these small schools and that if there may be said to be a silver lining to this rather dark cloud which has been painted today about the Hampshire schools, it is the extraordinary devotion of the teachers and staff, who are doing their utmost under these difficult conditions.

Mr. Prentice: I accept that absolutely, That is why it is important to get as good an allocation for minor works as possible. That, however, is not an argument against the stricter control of mini-minor works within the programme, but is a reason for having as large a minor works programme as we can manage. As I have said, the minor works programme throughout the country will be £21 million this year as against £18 million last year, and one would like to see it improved even further.
As to future programmes, the Government are looking at public expenditure as a whole in relation to their economic plan. This is a review of the whole field of public expenditure, which will determine the amount to be allocated for school building between now and 1970. The share that Hampshire or any of the 160 other authorities gets will depend upon the national total and how we have to allocate within it. Certainly, the country as a whole should be doing more about these matters. This depends upon our getting the right rate of economic growth and giving the right priority now and in the future to education.
I am conscious of the needs of Hampshire. I had the pleasure of visiting there a few weeks ago and in the company of Alderman Quilley, Chairman of the Education Committee and many of his colleagues I met the Chief Education Officer, and I agree with the estimate of him which the hon. Member for Bournemouth, East and Christchurch has given. They quite rightly drew my attention to the local problems. It is part of the national problem.
It is a fact that over many years the nation—again, the major responsibility rests with hon. Members opposite—has not done enough for educational development. This year, the total school building programme is about £100 million


compared with just over £80 million last year. That improvement is due partly to decisions of the last Government and partly to minor additions that we have made subsequently, but, certainly, we all want to see a growing school-building

programme so that we can really make an inroad into the kind of problems which have been mentioned in this debate.

Question put and agreed to.

Adjourned accordingly at six minutes past Twelve o'clock.